Pensions auto-enrolment set to include teenagers but ‘huge question’ remains over self-employed

18 December 2017

Young workers aged 18 to 21 will be enrolled in company pension schemes for the first time under plans from the Department for Work and Pensions (DWP).

Currently auto-enrolment only kicks in for younger workers at the age of 22. The planned change means that most workers will in future contribute towards a pension from the very first job they have out of education. According to some estimates, this could count towards as much as an extra £60,000 in retirement for those who begin saving from age 18.

Research by workplace pension provider Now: Pensions has found that more than two thirds (69%) of 18-21 year olds think that being enrolled in a workplace pension is a good idea.

The review also recommends changing the contributions calculation from the lower earnings limit (currently £10,000 per year) to the “first pound earned” which according to DWP will add an extra £2.6 billion into national pension savings.

The DWP says this will encourage people who work in multiple jobs to stay opted in to the scheme. It will also simplify the calculations that employers must make when assessing their workforces’ contribution levels.

Secretary of state for work and pensions, David Gauke, says: “This Government has rebuilt the UK’s savings culture. For an entire generation of people, workplace pension saving is the new normal. And my mission now is to make sure the next generation of younger workers have the same opportunities.

“We are committed to enabling more people to save while they are working, so that they can enjoy greater financial security when they retire.

“We know the world of work is changing, so it is only right that pension saving does too. This ambitious package will see more people than ever before helped onto the path towards building a secure retirement.”

A spokesperson from DWP says that working with with employers and the pensions industry these recommendations will be implemented by the "mid-2020s", but due to various factors affecting the implementation cannot be more specific than that at this time. 

Darren Philp, policy director at The People’s Pension, says: “Extending pensions cover to younger people in the workplace is exactly the kind of move that we were hoping to see from the review. The earlier people start saving, the more investment growth can do the heavy lifting for them in saving for their retirement. It also kick-starts the savings habit from an earlier age.

“At a time when half the UK believes they won’t have enough money to support their desired lifestyle once they’ve finished work, it’s vital that we enable people to start planning ahead as soon as possible.

“It’s bizarre that since the inception of auto-enrolment, people’s contributions have not been based on their entire salary. The People’s Pension has long-called for this to change as we believe it’s nonsensical and adds an unnecessary layer of complexity to an already complex system. We are pleased to see that people will now be supported to save more as contributions will now start from the first pound of someone’s pay packet.”

“Huge question mark over auto-enrolment for the self-employed”

The review also includes proposals for the government to begin testing a series of ‘targeted interventions’. Suggestions include helping self-employed workers to set up pension plans through ‘touch points’ with organisations such as banks or labour contractors. The governments says they want to “explore how technology can be used to increase their pension saving”.

But there are question marks as to whether this goes far enough. With 15% of the national workforce self-employed, this means that millions of workers are still not saving properly for their retirement.

Jon Greer, head of retirement policy at Old Mutual Wealth comments: “Automatic enrolment has been a dramatic success for behavioural economics. It has harnessed the power of inertia to ensure huge parts of the UK population are saving for their later life.  However, it omitted parts of the UK population, most notably the self-employed.

For this year’s review, the government had continually committed to address this omission. Guy Opperman, pensions minister, went so far as saying ‘there is no doubt’ that the self-employed will be included in auto-enrolment. However, if the auto-enrolment earnings trigger had been applied to the self-employed it would not have captured the entire self-employed population – far from it.

“With the current framework approximately two million of the five million self-employed would fall within the net, according to research conducted by the Pensions Policy Institute on behalf of Old Mutual Wealth. Even with the proposed shifts in age thresholds and earnings bands, there will remain a large part of the population that will not be captured. But it can be argued that there is a reasonable justification for not doing so.”

Tom Selby, senior analyst at AJ Bell, adds: “There remains a huge question mark over auto-enrolment for the self-employed. The Conservative Party made a manifesto commitment to include them in the auto-enrolment reforms. 

“Most would regard the new pledge to simply encourage self-employed people to save in a pension, rather than them being auto-enrolled and having to opt out, as breaking this manifesto commitment – hardly a road the Government will want to go down having already had its fingers burnt when trying to raise NI contributions for the self-employed.”

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