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Teenagers to be automatically added to company pensions for the first time

Sam Meadows
Young workers in low-paid jobs, such as construction, will pay into pension schemes for the first time - Bloomberg

Hundreds of thousands of teenage workers will save into a pension for the first time under Government plans to dramatically expand its flagship savings programme.

The results of the review into "automatic enrolment", the system by which workers are automatically put into a workplace scheme, is set to be published tomorrow and will confirm the minimum age for eligibility will be lowered from 22, to 18.

Earlier this year this newspaper revealed the plans to bring younger savings into the scheme, which has led to over nine million people saving for a pension for the first time. The Department for Work and Pensions says the move will create 900,000 new pension investors and £800m of extra savings.

The Government is also to remove an anomaly of the current system, known as “banded earnings”, whereby contributions are based on only a portion of a worker’s salary. Low earners are particularly disadvantaged by this. 

Allowing contributions to be calculated from the first pound earned will mean workers earning the national average salary of £27,000 save an extra £235 a year, according to AJ Bell, the pension provider. Their final pot would be boosted by more than £50,000.

The point at which a worker is automatically added to a scheme will remain at its current earnings "trigger" of £10,000 a year.

Sir Steve Webb was pensions minister in 2012 when the auto-enrolment scheme was first introduced Credit: Aliona Adrianova

It had been thought a solution would be found for Britain's growing army of self-employed workers. At the moment, it is up to these individuals, thought to number nearly five million, to make their own provision for retirement. The DWP has only said it will use “targeted interventions” to explore ways technology can increase pension saving among this group.

AJ Bell's Tom Selby said the Tories had broken the party's manifesto commitment to include the self-employed.

"This is hardly a road the Government will want to go down having already had its fingers burnt when trying to raise National Insurance contributions for the self-employed in the Spring Budget."

On the whole the proposals have been welcomed by the pensions industry, however the plans may not actually take effect for a decade. The Government set a target of the "mid-2020s". 

David Gauke, Secretary of State for Work and Pensions, said: “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.”

Auto-enrolment was introduced in 2012 and has led nine million workers to save into a pension for the first time. The initial contribution rate is 2pc, split evenly between worker and employer. But this will rise in April 2018 to 5pc, where employees pay 3pc and employers 2pc, and again in 2019 to 8pc (employees pay 5pc, employer 3pc).

Pension auto-enrolment

Mike Cherry, chairman of the Federation of Small Businesses, estimated that rising contribution rates, coupled with the end of banded earnings, will cost small employers an average of £180 per employee.

“For employers in certain sectors, such as care and hospitality, where margins are tight this will really add up,” he warned.

Ruston Smith, a director at provider The People's Pension described auto-enrolment as a “game changer”. While Chris Curry, of the Pensions Policy Institute, said the changes tackle one of the biggest challenges facing the industry: undersaving.

He explained: “By removing the lower earnings limit we’ll be enabling people to contribute towards their pension savings from the first pound of earnings.”

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The removal of banded earnings will prove a massive boost to savers, who previously only received contributions on a portion of their salary. Savings taking into account an entire salary will boost contributions by hundreds of pounds a year and lead to a much more valuable final pot.

Assuming a salary rising by 2pc a year, someone earning £27,000 now would see their final pot rise from £227,860 under the old system to £279,652 under the proposed changes, according to AJ Bell’s calculations.