"There are many other barriers to adequate pension saving including the ever shrinking annual allowance and the money purchase annual allowance"
Last week, DWP backed measures to expand automatic enrolment.
The changes include requiring automatic enrolment of employees as soon as they reach 18 and applying the mandatory 8% contribution to earnings ‘from the first pound’.
The pensions industry was split on whether the changes go far enough and will provide a meaningful boost to workers' pension savings.
Industry experts reacted largely positively to the news.
Kate Smith, head of pensions at Aegon, said: “It’s fantastic news that the Government has confirmed its support for enhancements to auto-enrolment, originally put forward back in 2017.
“Basing contributions from the first pound of earnings rather than on a band above £6,240 will mean contributions from both individuals and employers increase. Employees pay 5% so this equates to £312 a year, but after tax relief, this is just over £20 a month. But with employer contributions, this will be boosted to £499 a year extra. To avoid an overnight change, it will be important to introduce this gradually over a number of years, particularly as we emerge from the current cost of living crisis. Otherwise, someone earning £12,480 would see their contributions double overnight.
“It is also hugely welcome that those aged between 18 and 22 will in future be auto-enrolled. This will get younger employees into the pension savings habit earlier, and won’t ‘miss’ it from their pay. And it’s the contributions paid in the earliest years that have longer to grow with investment returns.”
Gary Smith, director of financial planning at Evelyn Partners, commented: “If these proposed reforms to auto-enrolment are enacted, it would dramatically boost the numbers of younger workers saving into a workplace pension and the amounts being saved by lower earners – by ensuring they are saving from the first pound earned.
“Given the powerful effects of compounded returns, early pension saving is hugely benefitial, and can prevent savers later in life having to make up for lost time by funnelling a large percentage of their monthly pay into their pension.
“The DWP backing for this bill may go some way to remedying the low savings rate among lower earners and that’s to be welcomed. The self-employed are now the cohort who might get left behind in terms of private pension provision, unless the authorities devise some imaginative nudges to address that was well.”
Michele Golunska, managing director for wealth and advice at Aviva, added: “This is great result for young pension savers, who will benefit from getting on the pension ladder earlier and those all-important employer contributions. It is also good news for the lowest earners and those working multiple jobs who would benefit from getting pension contributions from the first pound they earn.
“This is a step in the right direction, and we look forward to working with government to bring in these reforms.”
Samantha Gould, head of campaigns at NOW: Pensions, commented: “This is a watershed moment for the pensions industry, one that we have long called for and championed the benefits of for savers. Since auto enrolment (AE) was introduced in 2012, it has brought an additional 10 million people into workplace pension saving, but millions are still locked out of the current system.
“Reducing the age to 18 from 22 and applying mandatory 8% contributions to earnings from the first pound may be the clearest example of widespread change for pension savers since the initial introduction of AE. Our underpensioned research with the PPI has revealed that starting pension contributions from the first £1 of earnings would increase the pension wealth for some groups by as much as 52%.
“Pensions have needed evolution, not revolution, to continue on the path that began with AE. While this is a moment for celebration, we’re not at the finish line yet and we will continue to work with government and industry stakeholders until these reforms are fully delivered.”
However, advisers are less confident that the changes are widespread enough.
Luke Thompson, director at PAB Wealth Management, said: "This is a good step in the right direction as the biggest factor in saving for retirement is that the sooner you start the easier it is. However, realistically most people at 18 will only earn a very small amount and with this, in mind, the amount they contribute will be minuscule.
"The bigger issue is the self-employed I often speak to self-employed people who have absolutely no pension savings whatsoever and no plan to tackle their lack of savings either. Too many people feel they are invincible and won't need a pension and we need to remove the barriers to advice and get more people thinking about their plans for retirement."
Helen Llewellyn, director at Infinity Wellbeing, commented: "These changes will not make a meaningful difference. Those that want to be in a pension can already join from age 18 and choose to put in more. They rarely do.
"With the cost of living being so high who can afford to put more into their pension? This applies to employers as well as employees as it affects them both."
David Robinson, co-founder at Wildcat Law, said: "Expect to see the number of individuals opting out skyrocket . The rationale for the original rules revolved around affordability vs long term benefit. With the cost of living crisis and people struggling to make ends meet the timing on this could not have been worse. People on the lowest of incomes simply are not going to be able to afford to make contributions and even if it could they are unlikely to see any real benefit at retirement.
"The number of NEETs is also likely to be effected at a time when we are seeing a significant increase in their numbers. Companies suddenly facing an increase in their wage bills will be forced to cut back on recruitment which always hits the youngest hardest.
"Unfortunately, this is nothing more than a cynical attempt to push yet more indirect taxation onto the poorest in society."
Samuel Mather-Holgate, independent financial adviser at Mather and Murray Financial, added: "These changes would be a positive step forward if the burden didn't fall on the employer. Businesses have had massive tax hikes this year and a flailing economy makes this even more difficult. If these changes were introduced at a time of fiscal easing they would be widely supported. However, there are many other barriers to adequate pension saving including the ever shrinking annual allowance and the money purchase annual allowance that is a barrier to people returning to the workforce in later life, just what the government needs."
