Auto-enrolment (AE) reforms mean that 18-year-olds are set to gain £150,000 by the time they reach retirement, according to Aegon.
The new AE extension bill means that instead of waiting until a worker makes over £6,240 annually, both employers and employees will need to contribute more money towards retirement, starting with the first £1 earned. Second, instead of waiting until they are 22 years old, people will begin saving for retirement when they are 18 years old.
According to Aegon, eliminating the £6,240 cap will encourage everyone to increase their retirement savings, especially if they are younger. Someone who is 22 today may have an additional £93,400 in their retirement fund by the time they are 68, which when inflation is accounted for is equivalent to having £37,500 in today’s money. People will need to contribute a little bit more of their own money, around £20.80 per month if they pay basic taxes to achieve this.
Aegon says that those who start working at age 18 stand to gain the most. By eliminating the offset, they may win £105,300, and they could also gain an additional £44,700 by being granted automatic access to an additional four years of pension contributions and investment gains. Their retirement savings by age 68, when they anticipate receiving their state pension, might increase by a total of £150,000 or £55,700 in today’s currency.
Aegon pensions director Steven Cameron said: “The auto-enrolment changes are great news for pension savers and will, over time, lead to scheme members having significantly more in their retirement pots.
“The gradual change to basing contributions on earnings from the first £1, rather than only on earnings above £6,240, will have wide-ranging benefits. Many schemes base pension contributions on the minimum definition of earnings above £6,240 and everyone in such a scheme will see a rise in contributions, boosting their retirement funds. While this will mean personal contributions also increase in stages, the maximum increase for a basic rate taxpayer will be £20.80 a month, or around £5 a week, but this is worth twice as much in their pension after employer contributions and Government tax relief.
“The change will benefit workplace savers of all ages, but those with longer until retirement will see the biggest gain. Based on the offset being gradually removed over three years, a 22-year-old could see their pension value boosted by £93,400 (£37,500 in today’s money) by age 68.
“For a 30-year-old, the increase is £59,200 (£27,900 in today’s money). The boost for a 40-year-old is £31,300 (£18,000 in today’s money). And for a 55-year-old, their fund value at age 68 could be £8,600 higher (£6,600 in today’s money) than it would be if the offset applied throughout their time saving.
“One group who will be ‘double winners’ are those joining the workforce at age 18. At present, employers needn’t enrol employees until age 22, but the changes will now see all employees earning over £10,000 a year auto-enrolled from age 18. This will mean younger employees automatically benefit from up to four years extra of contributions and investment growth.
“If the current offset is gradually removed over three of those four extra years, an 18-year-old earning £20,000 per year could achieve a pension pot of £469,600 (£174,400 in today’s money) upon reaching 68. This is a huge extra £150,000 (£55,700 in today’s money) over what current rules might produce, where an individual isn’t auto-enrolled until 22 and is subjected to the offset throughout.”