Student workers could add thousands of pounds to their pension if the Government presses ahead with the extension of automatic enrolment to 18-year-olds, according to new research from PensionBee, the leading online pension provider.
More than half of full-time students work an average of 14.5 hours a week during term time to help fund their studies. Yet only 2 in 10 workers aged 16 to 21 have a workplace pension, largely due to current legislation that excludes workers under the age of 22 and those earning less than £10,000 from the benefits of automatic enrolment.
Under the existing rules, students under the age of 22 who earn between £6,240 and £10,000 must actively opt in to their workplace scheme to receive the 3% mandatory employer contribution. Those earning less than £6,240 can also request to join the scheme but employers are not required to contribute. However the new legislation would mandate employers to auto-enrol employees from age 18 and to contribute to their pension from the first £1 of earnings, although this would still only automatically apply to those earning more than £10,000 a year.
PensionBee’s calculations reveal that an 18-year-old student earning around £5,500 a year who opts in to a workplace pension could save approximately £450 annually through combined employer and personal contributions1. If they were to continue contributing at this rate for an additional three years (two further years of study plus a year of part-time work), taking into account an increase in the National Minimum Wage after their 21st birthday, these contributions could grow to £2,034 by age 22, adding £4,748 by a retirement age of 68, assuming an annual management fee of 0.7%, 5% annual investment growth and 2.5% inflation (see Table 1).
Becky O’Connor, Director of Public Affairs at PensionBee, commented: “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. While the Labour government has been quick to announce a raft of changes to pensions, 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. However, opting in after the introduction of the auto-enrolment extension would potentially be more financially beneficial in the longer run - and this early lesson in setting money aside for the very long term is more likely to reap dividends later on.”
Table 1: The impact of contributing to a pension during student years
| Pension pot size at age 68 without contributions from 18 to 22 | £197,315 |
|---|---|
| Pension pot size at age 68 with contributions from 18 to 22 | £202,063 |
| Difference | £4,748 |
Source: PensionBee, August 2024. Calculations assume the student earns the National Minimum Wage throughout their three years of studies and one year of part-time work (£8.60 for ages 18-20 and £11.44 for ages 21+), working 14.5 hours per week for 44 weeks, with reduced hours during holidays. The projections also assume a retirement age of 68, an annual management fee of 0.7%, 5% annual investment growth, and a 2.5% annual inflation rate.
Footnotes
- The calculations assume the student is paid the National Minimum Wage of £8.60 for 18-20 year olds, working 14.5 hours per week over 44 weeks, assuming reduced hours during holidays, giving a total earning of £5,483.80 a year.
