Huge change to pension rules could boost 4.7million workers’ saving pots by £46,000
MILLIONS could be £46,000 better off in retirement due to a huge change to pension rules.
Scottish Widows is calling on the new Labour government to take forward a raft of changes to auto enrolment schemes.
It said the adjustments could result in 4.7 million more people receiving pension contributions from their employer.
The changes are expected to happen, but an exact date for when they will come into force has not yet been confirmed.
One of the proposed changes to the rules would lower the age at which people are automatically placed in a workplace pension to 18, rather than 22.
The pensions company said this would see younger people engage earlier with pension saving and add as much as 15% to pots.
The second proposal is axing the the lower earner’s limit (LEL) and see a worker on any amount of income be able to save automatically.
As it stands, a huge number of people earning between £6,240 and £10,000 a year are also missing out because they are not automatically enrolled in their workplace pension.
If you earn between these amounts, you can still ask to join and your bosses will still have to pay employer contributions.
Scottish Widows said both of these changes could boost the average 18-year-old’s future pension pot by £46,000 – an increase of 45%.
Pete Glancy, head of pensions policy at Scottish Widows, said these measures would benefit all age groups, particularly younger workers, by ensuring more people in the UK save adequately for the future.
He added: “Now is the time for action and commitment to improving pension savings and this should form a pivotal part of the new government’s plans.”
The company is also urging the government to gradually raise default pension contributions to 12%.
As it stands, a minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
It said this could put 370,000 people on track for affording at least a basic lifestyle in retirement who are not currently and increase the future pension pot of an average 18-year-old by an incredible £157,000.
This would amount to a whopping 87% increase compared to if they only saved 8%.
Scottish Widows said low savings rates among the self-employed is another issue that needs to be addressed.
An equivalent to auto enrolment for the self-employed would be required to help over four million self-employed workers have the same retirement prospects as employed workers, it said.
How do I consolidate my pension?
IF you have several workplace pensions that you're no longer paying into, you might be better off consolidating them into a single pot.
There are several advantages to this.
The first is that by having your savings all in one place, you’ll only pay one set of fees.
You can also choose which pension provider you want to transfer the different savings to, so you can pick the best one for you.
It also makes it easier to keep track of your money.
You might want to move all your money to whichever of your existing pots has the best fees, or you could move it all to your current employer pension (if you have one).
Alternatively, you may wish to move money to a private pension or use a consolidator service, such as Pension Bee, Aviva, or Wealthify.
Make sure you compare and contrast your options carefully so that you’re picking the best home for your savings.
You’ll need to look at fees but also might want to consider the investment options available.
If any of your pots are over £30,000 you’ll need to get independent financial advice, but even if you have lots of smaller pots you should consider speaking to an independent financial advisor (IFA).
You can use Unbiased or VouchedFor to find a recommended advisor near you.
Also ask whether you’ll be charged a fee to exit your existing provider and to join your new provider, plus whether the age at which you can access your pension is different – for most people this is currently 55, but is set to rise to 57.
You also need to ensure the pension you’re leaving doesn’t come with valuable added perks, or you could lose out.
Stay alert for pension transfer scams as fraudsters often target people transferring their pension with promises of investments that are too good to be true.
How much is the workplace pension worth?
When you join a company and earn over £10,000, you are “automatically enrolled” into its workplace pension scheme.
Anyone enrolled in a workplace pension has a minimum contribution rate of 8% but crucially, not all of this comes from your salary.
A minimum of 3% is paid by your employer, and basic tax rate payers will also have 1% of their contribution paid via tax relief.
The average salary for a full-time worker in the UK is £34,963, according to the Office for National Statistics (ONS).
Between the tax relief from the Government and the payment from the company, a typical earner would therefore receive £1,398.52 a year in free money towards their retirement.
If you worked for 35 years, that adds up to £48,948.20 in free cash from your bosses and the government.
The money in your pension is then invested with the aim of growing the pot over time.
If you got returns of 5%, the pot would be worth £269,998 when you retire.
Even with very low growth of 2% it would be worth £97,891, and with high growth of 8% you’d have a pot worth £723,713.
Of course, with retirement ages rising to 67, many people work far long than 35 years, meaning the gains could be even higher.
But ultimately, in return for just 4% of your salary each month, you get hundreds of thousands of pounds of free money.
What is auto-enrolment?
Auto-enrolment is when you’re automatically placed into your workplace pension scheme, with your contribution deducted from your pay packet.
Bosses have had to automatically enrol staff into pension schemes since October 2012 to get workers saving for their golden years.
The only exception is if you’re under the age of 22 or earn under £10,000, in which case you have to ask to opt in.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
Crucially, the contribution you make as an employee is deducted before tax – so the actual amount you’re putting away is less than it sounds.
For example, if you pay 20% tax on your earnings, and your pension contribution is £100, this only really costs you £80 as this is how much that amount would have been worth after tax.
While opting out of a workplace pension would increase your monthly salary, it’s best to only do this as a last resort, as you’ll have less in later life.
To be eligible for auto-enrolment, you need to meet the following criteria:
- Be aged between 22 and State Pension Age
- Earn over the earnings threshold (£10,000), and
- Work, or ordinarily work, in the UK and have a contract of employment
If you earn between £6,240 and £10,000, you don’t qualify for auto-enrolment, but you can still ask to join and your bosses will still have to pay employer contributions.
If you earn less than £6,240, the business doesn’t have to pay contributions (although some choose to) but you will still benefit from tax relief from the Government and investment growth.
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