Thousands of workers are in for a significant boost to their savings in addition to an upcoming pay rise
Thousands of workers are in for a significant boost to their savings in addition to an upcoming pay rise. Starting in April, the minimum wage will increase, resulting in millions of people receiving up to an extra £1,800 per year. This pay rise will also lead to increased pension savings for workers. Specifically, the National Living Wage for individuals over 21 will rise from £10.42 to £11.44, benefiting nearly three million workers with a pay increase of approximately 10%.
Minimum Wage Increase
Thousands of workers will be automatically enrolled in a workplace pension for the first time, which will result in an additional pension boost worth £4,521.
The threshold for pension enrolment is set at annual earnings of £10,000. As a result of the wage increase, individuals working 17 or 18 hours per week will surpass this threshold and begin saving for retirement. According to Steve Webb, a partner at consultants LCP and former government pensions minister, this is an important step toward building a solid pension fund and being able to retire comfortably. The auto-enrolment rules, introduced in 2012, have led to 10.7 million people contributing to a workplace pension.
Both employees and employers contribute to workplace pensions, with the total contribution amounting to 8% of salaries. Employees contribute 5% of their salary, while employers contribute at least 3%, although some may offer more.
For individuals working 17 hours a week, their annual salary will increase from £9,211 to £10,113 after the National Living Wage rise. In this case, the employer’s pension contribution will be 3% of the individual’s qualifying earnings above £6,240.
For a salary of £10,000, this amounts to £3,760 qualifying for 3% contributions, equivalent to £112.80 per year. Over 40 years, this sum adds up to £4,512, excluding any investment growth. Full-time workers on the National Living Wage will also save an extra £150 per year towards their retirement.
The increase in the National Living Wage will also result in a larger annual pension contribution for employees, totalling £1,166, including both their own and their employer’s contributions. Over 40 years, this translates to an additional £6,000, without considering investment growth.
Starting from April, the National Living Wage will apply to 21 and 22-year-olds, who will also benefit from the pension boost. However, individuals aged 21 will not be automatically enrolled in a pension; the auto-enrolment system begins at age 22.
Auto-enrolment was implemented to help prevent pensioner poverty by encouraging more people to save for retirement. The state pension alone, which amounts to £11,500 per year from April, is insufficient to cover living expenses.
The Pension and Lifetime Saving Association suggests that individuals currently retiring need a minimum annual income of £14,400 or £31,300 for a moderate lifestyle. Achieving these income levels requires pension savings ranging from £40,000 to £70,000 and £300,000 to £500,000, respectively. For a comfortable retirement, including international vacations, an income of £43,100 annually is needed, equating to a total savings pot of £490,000 to £790,000.
