THOUSANDS of workers could get a major cash boost to their pension as a result of the national living wage being raised.
On Wednesday, Chancellor Rishi Sunak announced that the national minimum wage would rise to £9.50 from next year.
The news was welcomed by many, who will see their pay go up by 59p an hour and roughly £1,000 a year.
But another result of the change means that many people who previously didn't qualify because they earned too little, will now be auto-enrolled in a pension.
Experts say this could be affect thousands of workers, and particularly those who are employed part-time.
Steve Webb, partner at LCP said: “An increase in the minimum wage will take thousands of part-time workers above the £10,000 per year threshold at which their employer is required by law to put them in a pension.
"Although the amounts involved will be relatively modest, such workers will benefit from a valuable 3% employer contribution into a pension pot in their name, which is to be welcomed”.
From employer contributions alone, workers could potentially see a boost of nearly £4,800 added to their pension pot over a working lifetime, according to experts.
Those who were previously earning a salary of £10,000 will see that nudged up after the wage hike.
The extra pension contribution from their employer will be 3% of their "qualifying earnings".
The minimum for that is just over £6,000.
That means 3% of your salary over £6,000 is eligible for pension contributions from your employer.
On a £10,000 salary, that means you'll get 3 per cent of £4,000 – equivalent to £120 a year paid into your pension by your employer.
Over 40 years that adds up to £4,800 – and that's before taking into account any investment growth.
Pension contribution boost
It's worth bearing in mind, too, that under auto-enrolment employees are required to make their own contributions too.
Currently the minimum employee contribution is 5 per cent but part of this comes from tax relief from the government.
That means 8 per cent of your qualifying earnings are paid into your pension pot each month.
Sticking with a £10,000 salary as an example, 8 per cent of the qualifying annual earnings of £4,000 would be £320 a year.
Of this, only £128 comes out of your own pocket – the rest comes from your employer and the government.
It's a great example of how to get free cash by saving for your future. 160+120
Over 40 years that adds up to a pension pot of £12,800. Again this doesn't factor in investment growth or wage increases.
According to pension experts at Aegon, currently minimum wage employees working full-time will be contributing £798 a year into their pension.
This will go up to £884 as a result of the national living wage hike – an extra £86 a year.
Kate Smith, head of pensions at Aegon, said: “We welcome the Government taking steps to put more money in the pockets of hard-working individuals and making work pay.
"With the economy recovering better than expected post pandemic, the Chancellor has tackled the spectra of rising cost of living head on, by incentivising individuals to stay in work and encouraging them to look ahead to build a more financially secure future.
Other changes from the budget helps Brits get into better financial standing too, as things like changes to the Universal Credit taper will mean workers are able to keep more of the money they earn.
There could even be more pay rises to come, with minimum wage expected to reach £10 an hour by the next election in May 2024.
Because borrowing is £135billion lower than predicted, the Chancellor has more money for the three-year spending review to be unveiled alongside his Budget.
Experts have predicted that the minimum wage rate will increase even further by the time the next general election rolls around, so this could boost pension pots even further.
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