An increase to the National Living Wage, announced in the Budget by Chancellor, Rishi Sunak, will have a positive impact on auto-enrolment pensions, according to one pensions expert.

Delivering his Budget today, 27 October, Sunak announced that the National Living Wage will be increased to £9.50 an hour from April 2022, up from £8.91, which is an increase of 6.6 per cent.

Aegon head of pensions, Kate Smith, highlighted that not only will this put more money in the “pockets of hard-working individuals”, it will also increase the pension contributions for those on the National Living Wage and will bring more people into the scope of auto-enrolment.

“A rise in the National Living Wage to more than double the increase in the cost of living will enable people to benefit from increased pension contributions to their workplace pensions as a result of the money paid in through auto-enrolment.

“Individuals on the National Living Wage will welcome confirmation of a future increase in their hourly rate to £9.50 an hour more than double the increase in the cost of living. What they may not realise is that as a result of automatic enrolment, any rise in the minimum wage will also mean they benefit from increased pension contributions to their workplace pensions,” she explained.

Workers who earn over £10,000 a year that are eligible for auto-enrolment have a total of 8 per cent of qualifying earnings paid into their pension, made up of employer and employee contributions, and tax relief. The increase to the National Living Wage will also mean that more individuals will now qualify for an auto-enrolment pension.

“Based on an increase in National Living Wage to £9.50 an hour, employees working for just over 20 hours a week will meet the minimum income threshold to be enrolled in a workplace pension and automatically benefit from an employer pension contribution," Smith said.

“Currently, minimum wage employees working full-time will have a total pension contribution of £798 per year. This will increase to £884 with a rise in the National Living Wage to £9.50 meaning they will have an additional £86 going into their pension over the course of the year. While this might not seem a lot, even a small increase today with compound investment growth over many years will prove very beneficial to future retirement savings, especially for those just starting out in their careers.”

In addition, Smith also praised the government’s intention to address the net-pay anomaly for those earners, which means affected low earners will be in line for a tax top-up on their pension contributions from 2025.

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