The inflation-busting increases to the national living wage will have a positive impact on pension contributions for many employees.
The government announced yesterday that the national living wage — now paid to all workers over the age of 21 — will increase by 6.7 per cent to £12.21 per hour in April next year.
The youngest workers (aged 18 to 20 years) will see an even bigger boost with the national minimum wage increasing 16.3 per cent increase — from £8.60 to £10 an hour — however workers of this age are not automatically enrolled into their company’s pension plans.
Previously both were known as the minimum wage, although this was set at different levels for different age bands. Employers who fail to pay these rates will be subject to fines from HMRC. These increases exceed the recommendations by the Low Pay Commission, and are part of the government target of having a single adult rate.
These announcements come ahead of today’s Budget, where Chancellor Rachel Reeves will set out tax and spending plans for the year ahead.
Aegon’s head of pensions Kate Smith pointed out that in percentage terms this is more than the 4.1 per cent increase that pensioners will receive from the triple lock next April. She adds that it is almost four times the September inflation rate (CPI) of 1.7 per cent used to increase most other benefits.
She says that giving a “massive” 6.7 per cent increase to the national living wage will bring much-needed relief for workers on the lowest incomes — significantly boosting their spending power, and helping to alleviate the ongoing burden of rising living costs.
Smith adds: “A hidden benefit is that the increase in the national living wage will also have a positive impact on pension contributions, enabling employees to build up larger pension pots.
“An increase to £12.21 an hour (£22,222 pa based on a 35-hour working week) means employees on this minimum wage who are auto-enrolled into a workplace pension will benefit from a total annual pension contribution of £1,278 a year — made up of their own and their employer’s pension contributions, meaning an additional £112 going into their pension over the course of a year.”
She points out that the minimum wage for under 20s and apprentices remains lower than the new national living wage but in percentage terms, their increases from next April are even larger, with 16 and 17 year olds receiving the apprentice rate getting the biggest percentage uplift of 18 per cent.
“Longer term, the government is considering opening up auto enrolment to employees aged under 22, who are currently excluded from pension saving. These increases in minimum wages make this even more pressing as currently, under 22 year olds are missing out on what would be a valuable employer pension contribution.”
These payments though remain below the ‘Real Living Wage’. This is a higher hourly rate, set by the Living Wage Foundation charity, designed to reflect current living standards. It is not a legal requirement for firms to pay this, but around 15,000 firms do so on a voluntary basis, covering almost half a million employees. This rate, for workers aged 18 and over, has also increased to £12.60 outside of London, and at £13.85 inside the capital.
Employees getting this rate who are automatically enrolled into a pensions will also see a knock-on boost to their retirement savings, said Smith.