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Pensions Coming of Age

At 18 you can get married without your parents’ consent, vote in a general election, purchase alcohol and tobacco and watch an 18 certificate film, but currently, you will not be automatically enrolled into a pension until you're 22.

It might seem a long way off but if you have a son or daughter who started secondary school last September, within seven years they could be saving for their pension upon starting work at 18. At least that’s the proposal from the government’s Automatic Enrolment Review. So far 9 million people have been automatically enrolled into workplace pensions but as it stands to be eligible you must be aged 21 and over. By decreasing the age limit, the government hopes to enable more young people to save towards their retirement, helping to create a culture of saving.

In 2012 the government changed workplace pensions from an opt-in system that relied on employees actively signing up to a pension scheme to an opt-out system that automatically enrols new staff. (For some of us old hands, this was reverting to the position prior to 1988 when employers could make membership of the pension scheme a condition of employment.) As a result, the number of eligible employees participating in a workplace pension has increased from 10.7 million in 2012 to 16.2 million in 2016. Automatic enrolment has been described by the government’s Behavioural Insights team, or ‘nudge unit’, as a textbook example of applying behavioural insights to government policy. Richard Thaler, the so-called ‘father of nudge theory’ won the 2017 Nobel Prize in Economics. Part of the reason Thaler won his prize was for work on lack of self-control. Thaler specifically demonstrated how inertia can help people exercise better self-control when saving for a pension. 

For most 18-year-olds saving into a pension certainly is not something that they would think to do with other more immediate priorities. The reality is that the earlier you start saving towards your retirement, the less you’ll have to save each year. As anyone struggling with their new year’s resolution will know, good intentions only go so far. The success of automatic enrolment lies in the inertia of having to take no active steps to save into a pension but having to take active steps to stop. It will be important to make sure that there are no unintended consequences of reducing the age such as making employers less willing to take on work experience students and also that it is part of a number of measures encouraging long-term savings.

For any questions on automatic enrolment or saving into pensions, call TPAS on 0300 123 1047 or start a live webchat with us.

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