Workplace pensions: earnings limit change makes pension saving easier for more people

Millions of people may potentially benefit from a larger pension pot when they retire thanks to changes being made to workplace pensions.

Workplace pensions have pushed employers of all sizes to open pensions for their staff, helping them supplement the money they get from the state pension.

Now the government has pledged to support a bill that will open up workplace pensions to greater numbers of people, boosting the size of our pension pots in retirement.

So how do workplace pensions work? And what will the bill change around workplace pensions?

What are workplace pensions?

Workplace pensions are also known as auto-enrolment pensions and were introduced back in 2012. The legislation forces employers of all sizes to open a pension for their staff.

Crucially, bosses have to contribute towards that pension too, while your contributions also benefit from tax relief from the government. As a result, you will see your pension balance increase by more than just the money you put in.

For example, right now the minimum contribution for workplace pensions is 8% of your monthly earnings. That is calculated as 5% of your pay packet from you, with the additional 3% coming from your employer and the Government.

As a result, you are essentially getting free money from your employer, it’s just money that you can’t access until you are at least 55.

The money you save into a workplace pension is then invested. The assets it is invested in will depend on the pension provider your employer has elected to work with, as well as the investment style you have opted for.

While the pension provider will generally place you in a ‘default’ fund at the outset, you can pick a different style if you prefer. Nest, the government-backed workplace pension provider, has a host of different funds available such as an ethical fund, a Sharia-compliant fund, a higher-risk fund and a low-growth fund.

How workplace pensions are changing

A private member’s bill, launched by Jonathan Gullis MP and now backed by the government, will expand workplace pensions and ensure that more workers qualify.

At the moment, there are eligibility criteria around who is entitled to a workplace pension. Currently, workers need to be aged 22 and earn at least £10,000 per year in order for their employer to be required to open a workplace pension for them and contribute towards it.

However, the bill will remove that minimum earnings limit, and drop the age limit down to 18.

As a result, far more people will find that they are able to make use of the workplace pension scheme.

It’s worth pointing out that some employers already offered workplace pensions to staff who fell outside of the eligibility criteria, this just covers the minimum required.

Can I opt out of my workplace pension?

Workplace pensions have been really effective at getting people into the habit of saving for retirement, but they are not compulsory.

You can opt out of your workplace pension at any time ‒ the money will stay in that pot, hopefully gaining in value, ready for when you retire.

You’ll need to fill out a form from your pension provider in order to opt-out, and inform your employer too. 

Opting out lasts for three years. At that point, your employer will be required to enrol you once again, though you can opt-out again too. You can also ask to rejoin the scheme at any time.

Are workplace pensions a good idea?

Workplace pensions have pushed millions of people into saving into a pension, which they might not have done if left to their own devices.

There are some important benefits to be aware of, beyond simply having a pension in your name, too. The first is that workplace pensions are essentially a pay rise. By enrolling in the workplace pension, you get more money from your employer every month. 

Yes, there is the obvious downside that you can’t access it immediately, but it is still money that you would not have otherwise received.

Compounding is also an important factor to bear in mind. This refers to how the value of the money you put into the pension grows over time, as it is reinvested over and over again. By lowering the age and wage requirements, people can start benefiting from that compounding earlier, which potentially will mean a more substantial pension pot once they retire.

There are potential issues to be aware of though. With the cost of living crisis, it’s reasonable for people to debate whether the money they are saving into a pension would be better served being used today to cover household bills. 

In an ideal world you would remain in the pension, but rising costs mean some are having to make difficult decisions.

What’s more, the working world has changed. The days of remaining with a single employer for the entirety of your working life are largely over for many of us, but as you move employers you will inevitably build up a handful of different workplace pensions. Keeping on top of those may be a challenge, and you might prefer to consolidate them into a single pension.