Pensions: ‘Forcing’ young people to think about their future can make the present a better place

Flagship automatic enrolment reforms that require all employers to offer workers a pension have been hugely successful in boosting the number of people saving for retirement.

In fact, more than 10 million employees have now been auto-enrolled into a workplace pension since the changes were introduced in 2012 – many of them saving for retirement for the first time in their lives.

Getting people to save in a pension is just the start, however. The reality is the current minimum contribution rate – 4 per cent from the employee, 3 per cent from the employer and 1 per cent via tax relief – will not deliver a decent retirement income for lots of people.

At some point soon, we need to figure out how to get more people saving more money in pensions for longer.

Currently you need to be aged 22 or over to qualify for auto-enrolment. The previous Government pledged to cut this to 18 by the ‘mid-2020s’, meaning those who join the workforce early would have an extra four years to benefit from matched employer contributions, tax relief and, hopefully, investment growth. That could add up to an extra £20,000 in retirement, according to think-tank Onward.

There would potentially be added benefits in getting young people into the savings habit earlier, while the economy could also benefit if those extra pension savings are directed towards things like UK infrastructure projects.

A Private Members’ bill put forward by Conservative MP Richard Holden on Wednesday ramped up pressure on policymakers to take this reform forward.

It also backed expanding auto-enrolment to all workers regardless of earnings (currently you have to earn £10,000 or more to qualify) and scrapping the ‘lower earnings limit’ (currently set at £6,240) so the first pound of contributions qualifies for a matched employer contribution.

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None of these reforms should be viewed as a panacea – businesses would undoubtedly baulk at the prospect of paying more into pensions after two years of economic turmoil and there remains a need to engage people to take responsibility for their retirement. However, if we are to avert a crisis in the future then getting young people saving a little more is the bare minimum that will be required.

Tom Selby, is head of retirement policy at AJ Bell