20 January 2020

Young people face £18,000 pension pot penalty as government departments dither

5 min read

Steve Webb
Royal London



Research by mutual insurer Royal London has found that the delay in lowering the age limit for automatic enrolment from 22 to 18 will cost the typical school leaver around £18,000 on their pension pot.

Under current legislation, workers aged 22 or over who earn £10,000 per year or more have to be enrolled by their employers into a workplace pension, and employers have to contribute at least 3% of their ‘qualifying earnings’ into the pension. The lower age limit was originally set at 22 to make sure that students doing casual summer jobs or Christmas work did not have to be enrolled into a pension. But since the lower age limit was set, the government has introduced a concession which allows employers to delay automatic enrolment for three months after a worker starts a job. This means that employers can avoid enrolling those who do short-term season jobs, and the age 22 limit is no longer necessary.

In 2017 the Department for Work and Pensions undertook a major review of automatic enrolment and one of its conclusions was that the lower age limit should fall from 22 to 18. But more than two years later nothing has changed, and DWP has suggested that nothing may happen until the ‘mid 2020s’. The main barrier is believed to be HM Treasury who are opposed to the extra cost in pension tax relief of measures to extend the scope of automatic enrolment.

Actuaries at Royal London have calculated that the typical 18 year-old will end up with a pension pot around £18,000 lower (in today’s money) if they do not start pension saving until they are age 22. This reflects not only the loss of an employer contribution for four years and the loss of tax relief on contributions but also the loss of investment growth on money invested between age 18 and 22. 

Commenting, Steve Webb, Director of Policy at Royal London said:

‘Pretty much everyone agrees that enrolling people into a pension as soon as they start work makes sense. It reinforces the message that saving in a pension is the norm when you have a job, and it also reinforces the message that you should start saving as soon as you can.  Even employers are generally positive, preferring to have a single system for all of their workforce rather than a complex set of exemptions and rules about communicating with the under 22s. But typical Treasury intransigence means that this sensible proposal – endorsed by another government department – is now in limbo.  Meanwhile, hundreds of thousands more younger workers will miss out on a valuable leg-up towards their long-term savings goals. It is time that Treasury and DWP sat down together and agreed a timetable to implement this overdue change’.

Notes to Editors

1. DWP report announcing the results of their 2017 review is here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/668971/automatic-enrolment-review-2017-maintaining-the-momentum.PDF

2. Royal London estimates of pension pots based on minimum AE contributions either from age 18 or age 22, separately for male and female employees are:

                                                        Male            Female

Savings at 68 if you start saving at 18
                                                        £242,972     £210,248
Savings at 68 if you start saving at 22
                                                        £223,992      £192,565
Difference (£)
                                                        £18,980        £17,683
Difference (%)
                                                        8.5%             9.2%

About Royal London:

Royal London is the largest mutual life insurance, pensions and investment company in the UK, with assets under management of £139 billion, 8.6 million policies in force and 4,348 employees. Figures quoted are as at 30 June 2020.

For further information please contact:

Royal London Press Office