Cost of living: Call for better pension saving deal for under-22s and low-paid

Younger and lower-paid workers should be included in a scheme which sees people automatically enrolled into pension saving, a think tank says.

Current rules require workers aged 22 and above to be enrolled, and receive a contribution from their employer, when they earn more than £10,000 a year.

The Social Market Foundation (SMF) says those from minority ethnic backgrounds disproportionately miss out.

The government says it is planning to make these changes, when affordable.

Aveek Bhattacharya, research director at the SMF, a centrist think tank, said: "Sensible changes to pensions auto-enrolment rules would bring more ethnic minorities into pension saving, increasing their chances of enjoying the comfortable retirement that everyone deserves."

In a wide-ranging study, supported by the consumer group Which?, the SMF also called on the government to accelerate its plans to allow workers to be included from the age of 18.

That will reignite the debate over whether teenage workers would want some of their wages diverted into a workplace pension scheme, when their budget is squeezed by cost-of-living pressures.

Automatic enrolment explained

All employers must offer a workplace pension scheme to their staff, and automatically enrol those who fit certain criteria.

They include people who are not already signed up to a workplace pension, earn at least £10,000 a year per job, and are aged between 22 and state pension age.

Workers can opt out if they do not want to save. Otherwise, 5% of their earnings above £6,240 a year, including tax relief, and a contribution from their employer worth 3% of earnings, is automatically saved into a pension pot which is invested.

The idea is to encourage saving for retirement from an earlier age, to top up the state pension in later life. It has been widely regarded a success since its introduction in 2012, with relatively few people opting out.

The SMF said that people from ethnic minorities were much less likely than white Britons to save into a workplace pension, suggesting that 25% did so, compared with a national average of 38%.

They were disproportionately likely to be younger and poorer, meaning they were missing out. The think tank also suggested there was heightened scepticism about financial services within these groups, with lower levels of awareness and trust, even among those earning bigger salaries.

"Part of the responsibility for addressing this situation should lie with government, but it is also incumbent on financial firms to do their bit as well," it said.

Among its recommendations were:

• Employers making pension contributions from the first pound earned by an employee, with the worker starting to contribute when they earn enough to pay National Insurance

• Targeted support for new migrants to integrate them quicker into the financial system

• More research, awareness, and data collection about the issue

Workers can opt in to the pension saving scheme when they earn more than £6,240, but the SMF suggestion to cancel the earnings threshold follows similar calls from pension providers.

Andrew Tully, technical director at Canada Life, said: "The best ideas are often the simple ones and these recommendations are not only easy to deliver, but will reward many more people effectively saving for their retirements, increasing pension coverage irrespective of social or economic background.

"This will help many people who are multiple jobbers but where each individual job falls below the current £10,000 threshold, so won't enjoy the benefits of auto-enrolment. This includes many women."

The government said that it was planning to abolish the lower earnings limit, and cut the age for automatic enrolment from 22 to 18 by the mid-2020s.

"It is important that we make sure that these changes are made in a way and at a time that is affordable, balancing the needs of savers, employers and taxpayers," said Laura Trott, the Pensions Minister.

She said that automatic enrolment had "transformed pension saving", with more than 10.8 million workers enrolled into a workplace pension and an additional £33bn saved in real terms in 2021 compared with 2012.

Separately, the Institute for Fiscal Studies, has called on the government to overhaul the tax treatment of pensions.

The leading economic research group argues that the current system gives overgenerous tax breaks to those with the biggest pensions and the biggest contributions from employers.