Retirement system overhaul could boost pension savings by £5,000

Currently, only two in 10 workers aged 16 to 21 have a workplace pension.

This is largely due to legislation that excludes workers under 22 and those earning less than £10,000 from automatic enrolment benefits.

The proposed changes would require employers to auto-enrollment employees from age 18 and contribute to their pension from the first £1 of earnings.

However, this would still only automatically apply to those earning more than £10,000 annually.

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Under current rules, students under 22 earning between £6,240 and £10,000 must actively opt in to their workplace pension scheme to receive the 3% mandatory employer contribution.

Those earning less than £6,240 can request to join but employers are not required to contribute.

PensionBee's calculations show that an 18-year-old student earning around £5,500 annually could save approximately £450 per year through combined employer and personal contributions if they opt in.

Over three years, including two years of study and one year of part-time work, these contributions could grow to £2,034 by age 22.

By retirement age of 68, this could add £4,748 to their pension pot, assuming a 0.7 per cent annual management fee, five per cent annual investment growth, and 2.5 per cent inflation.

Becky O'Connor, the director of Public Affairs at PensionBee, said: "Reforms to auto-enrolment have the power to enhance millions of young people's financial futures and lay the foundation for a more secure retirement, raising overall pension awareness for younger generations."

However, O'Connor expressed concern about the lack of a clear timeline for implementing these changes.

She added: "The lack of a clear timeline for implementing these reforms means those students and other young lower earners who want to make pension contributions will continue to miss out, just like their predecessors.

"By making pension contributions a habit from the start of their working lives, young adults are more likely to continue to save consistently, benefitting from the power of compound returns, ultimately making a significant difference to one's retirement income over the long term."

"If they would rather just keep the money to help get them through their studies - they don't have to pay in. Opting in after the introduction of the auto-enrolment extension would potentially be more financially beneficial in the longer run."

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The expert emphasised the educational value of early pension contributions.

"This early lesson in setting money aside for the very long term is more likely to reap dividends later on," she said.

These insights underscore the importance of implementing the proposed changes promptly. By extending auto-enrolment to younger workers, the Government could significantly improve the financial futures of student workers and other young adults, setting them on a path towards a more secure retirement.