Early retirement apt for 18 is merely a fantasy, but £50 savings for younger workers could potentially amass a seven-digit pension, asserts HELEN CRANE.
In the UK, the pension landscape is undergoing significant changes, with the government and financial institutions encouraging citizens to save for their retirement.
One of the most significant shifts came in 2017, when the 2017 Auto-enrolment (AE) Review recommended lowering the starting age for AE from 22 to 18. This change aims to capture younger workers earlier, thus improving retirement outcomes and closing coverage gaps. According to the review, this could bring an additional £3.8 billion into pension savings annually.
The government expressed its ambition to implement these changes in the mid-2020s, though specific timings have not been set as of mid-2025. The motivation behind the change is to address risks of inadequate retirement savings for a significant portion of the working-age population, especially younger individuals who often do not qualify for AE at 22 but who could benefit from earlier saving.
Currently, under auto-enrolment, employees are required to pay 4% of their salary into their pension, with the government providing 1% in tax relief and the employer contributing 3%. If you can pay in £100 a month into a pension instead, it would give you a pension pot of £276,000 after 45 years, based on an annual return of 6%.
However, many workers only put aside the minimum contribution level. If you manage to boost your pension contributions later, for example with a pay rise, your pension pot would grow even more. Employers may choose to contribute more, and if an employee is struggling financially, they may be able to pay in less, but they will still benefit from compounding gains on investments.
The pension auto-enrolment was launched in October 2012, and since then, 88% of workers who can save into a work pension are doing so, according to Department for Work & Pensions figures from 2023. This is a significant leap from before the pension auto-enrolment, when doing nothing would have seen many people excluded from the pension.
The government has also launched initiatives to address the poor pension prospects of those not included in auto-enrolment, such as low earners and the self-employed. One such initiative is the Pensions Commission.
For those who are already in the workforce, it's never too late to start saving for retirement. If you are older and feel generous, consider paying £50 a month into a pension for your children or grandchildren. They will be very grateful one day.
On the other hand, young people starting their careers are often faced with financial challenges, such as paying for university tuition fees and high childcare costs. Childcare costs an average of £238.95 per week in England, according to MoneyHelper, while UK Finance reports that to put down a deposit on a home, they need to find an average of £34,500. Despite these challenges, saving for retirement should not be overlooked, and the benefits of early savings are substantial.
In conclusion, the pension auto-enrolment is a crucial step towards securing a comfortable retirement for many UK workers. Although the exact enactment date for the lowering of the AE age to 18 has not been set, the policy shift originated from the 2017 review and is expected to roll out in the mid-2020s. In the meantime, it's essential to start saving as early and as much as possible, even if it seems challenging.
- To secure a more comfortable retirement, individuals might consider investing their savings in finance opportunities, as the compounding gains on investments can significantly grow a pension pot over time.
- The government's initiative, the Pensions Commission, focuses on addressing the poor pension prospects of those not included in auto-enrolment, such as low earners and the self-employed, as part of a broader strategy to encourage personal-finance education-and-self-development.
- With the lowering of the auto-enrolment (AE) starting age to 18 expected in the mid-2020s, young people entering the workforce earlier will have the opportunity to start building their pension savings and improve their retirement outcomes.
