What’s a “comfortable” retirement?
According to Which last month (How much will you need to retire? – Which?), the minimum figure needed to be “comfortable” in your old age is £20,000. Whether or not that seems too much or too little for you, the same report also suggests that to get that income you will need up to £182,000 in your pension pot.
Which is a problem when the average pension pot is £42,651.
One way the government is pushing us all to save is “auto-enrolment”. Under this scheme, employers must automatically enrol eligible employees into a workplace pension scheme and contribute to their savings. The idea is that the scheme is quasi-compulsory (you must go in, but can opt to come out), and so everyone inadvertently gets into the pension saving habit.
Even so, it can take years to get to £182,000 – and keep in mind that’s just to give you £20,000 in retirement.
That in mind, changes to the rules around auto-enrolment are being proposed in a new bill currently progressing through government. A key change is to lower the minimum age at which employees are enrolled, from 22 to 18. Younger workers would start saving for their retirement earlier, potentially giving them more time to build up a substantial pension pot particularly when compound growth it taken into account.
Another proposed change is to remove the lower earnings limit, which currently stands at £10,000 per year. This would mean that all eligible workers, regardless of their income, would be automatically enrolled into a pension scheme by their employer.
Both of these proposals would incur additional costs for employers, who as a minimum must contribute 3% of the employees qualifying earnings to their pension with the minimum total contribution from both employer and employee being 8%.
The proposed changes to auto-enrolment are to be welcomed as a positive step towards improving the retirement prospects of workers in the UK. However, some have raised concerns that the changes may place an additional burden on small businesses, who may struggle to implement the new regulations. It remains to be seen how the proposed changes will be implemented and whether they will have the desired effect of increasing retirement savings.
Failure of employers to meet their legal obligations relating to auto-enrolment can lead to a penalty notice, therefore in order to avoid this it is important to ensure that all employers understand their obligations in relation to auto-enrolment.
As it is… this is looking like an 18th birthday present from employers that could be the most valuable and expensive gift someone receives!
For more information please contact Greg Davie by email, or by phone on 07862 258 405.