Working Britons will soon contribute an extra £500 a year to their pensions as changes to the auto enrolment scheme have passed through Parliament.
A bill to expand auto enrolment to all employees aged 18 and over, and for any amount of income, has been given Royal Assent meaning it will now become law.
Rachel Vahey, head of policy development at AJ Bell, said: “Removing the lower earnings band of £6,240 means increasing pension contributions by just under £500 a year for most automatic enrolment pension savers.
“This could provide a boost of over £120,000 to someone’s pension pot over the course of a 50-year career, depending on investment growth.
“The best bit is that the employer must pay at least £187 of this, meaning everyone with a standard workplace pension that meets minimum requirements will get more money toward their pension from their employer.”
Under the auto enrolment scheme, an employee has to contribute at least eight percent of their salary towards their pension.
This is made up of a standard five percent contribution from the employee which is matched by a three percent contribution from the employer, although these figures can vary as long as the minimum eight percent is put into the fund.
Many workplace schemes are set up so a larger amount is set aside each month further increasing the value of a person’s retirement savings.
With the changes, a person on the minimum wage could see their pension pot increase by over 85 percent.
Pensions minister Laura Trott said: “Automatic enrolment has been a phenomenal success, and we are determined to go further.
“It’s great news that the Private Members’ Bill has successfully passed through Parliament and received Royal Assent.
“This will mean younger workers and those in lower paid employment will be able to fully participate in automatic enrolment.
“For the first time, every eligible worker will benefit from an employer contribution from the first pound earned – which will make a huge difference to their eventual pension.”
Figures from interactive investor showed a person earning £30,000 at age 18 who pays into their pension until the age of 66 with their contributions increasing two percent each year, would see their retirement income increase by £199,000.
Alice Guy, head of Pensions and Savings at interactive investor, said: “The changes are particularly good news for women and poorer workers, who often struggle to save enough for retirement.
“Poorer workers are disproportionately affected by the current system that excludes lower earnings from automatic pension contributions.”
Renny Biggins, head of retirement at TISA, said: “We have long advocated for lowering the age threshold to 18 and removing the lower earnings limit, as these changes will enable more people to save for their retirement.
“We look forward to the implementation consultation that is due to be published this autumn. These changes may not seem significant at first glance, but throughout working life, they can make a substantial difference to the retirement outcomes of millions of workers, improving their financial security and well-being.”
Ms Guy called on the Government to increase the minimum contributions above eight percent as this is not enough for a comfortable retirement for many people.
She said: “Pension pots are currently far too low for most workers and won’t be enough for a comfortable retirement, so anything the Government can do to boost retirement savings is good news.
“Pension contributions from your employer are basically free money so what’s not to like.”
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