New legislation has paved the way for important changes to automatic enrolment in workplace pensions.
At the start of October, automatic enrolment in workplace pension schemes quietly celebrated its eleventh anniversary. The latest data (April 2021) from the Office for National Statistics shows that 79.4% of employees were members of workplace pension arrangements, a rise from 46.5% in April 2012. At a time when the ability of UK governments to implement any long-term project successfully is being questioned, automatic enrolment has been an undoubted success.
However, the roots of automatic enrolment are now over two decades old and reforms could be said to be overdue. The government published a review in 2017, but that kicked reform proposals down the road to the mid-2020s.
With that deadline coming into sight and no signs of action from the Department for Work and Pensions (DWP), last year a private member’s bill was introduced in Parliament that set in train two of the recommendations made in 2017:
- Lowering the minimum age for automatic enrolment from the current 22 to 18; and
- Removing the lower qualifying earnings threshold so that the minimum 8% contribution level is calculated from the first pound of earnings, rather than an initial £6,240 being ignored.
Like many private members’ bills, this one did not progress beyond its first reading. However, the effort did achieve the underlying goal – to prompt the government into action. The DWP gave its support for a replacement version of the bill that eventually passed into law as the Pensions (Extension of Automatic Enrolment) Act in September.
The Act makes no immediate changes. Instead, as with much current legislation, what it does is give the relevant department the power to introduce secondary legislation to bring the proposed changes into being at an as yet unspecified date.
In practice, the next stage will be consultations on the structure and implementation of the changes. Nothing is likely to alter before 2025 and the ending of the lower qualifying earnings threshold will probably be phased in to avoid a payments shock for low earners (and their employers).
In the meantime, if you think contributions based on all earnings are a good idea, there is nothing to stop you personally making the change now to boost your pension pot.
The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
Content correct at the time of writing.