A recent expansion of the Childcare Act could increase the retirement savings of parents by £1.2 billion according to new analysis from leading workplace pension scheme The People’s Pension1.
The Childcare Act2, which was introduced in 2010 to provide 15 hours of funded childcare per week for three and four year olds, was this month expanded to working parents of children from nine months to school age. It is estimated that it will allow 60,000 parents to re-enter the workforce once fully implemented3.
The People’s Pension has calculated that this increased workforce participation could result in a significant increase in pension contributions. At total pension contribution rates of 8%, parents returning to full-time employment could save £333 million over the period in which they benefit from additional childcare funding. This is estimated to grow to £1.2bn at retirement age4.
If contribution rates are increased to 12%5, parents could save just shy of £500m into their pensions, estimated to result in around £1.8bn in additional savings at retirement age.
The individual impact of this would be significant, increasing the pension pot of each individual who returns to work by nearly £20,000, potentially meaning they can retire as much as a year earlier.
While the recent expansion of funded childcare is expected to make it more financially viable for parents to return to full-time employment, even those returning on a part-time basis could substantially increase their pension pots. The People’s Pension estimates that workers returning on a part-time basis6 could contribute an additional £177m to their pensions, resulting in £625m more at retirement.
Nicola Sinclair, Head of Responsible Business at People’s Partnership, said:
“As a nation we are not saving enough for retirement, so it’s encouraging to see that the Childcare Act has the potential to increase workforce participation to a point where it could significantly boost retirement savings across the UK. As well as offering much needed support to young families today, the Act can empower parents to take proactive steps to strengthen their long-term financial wellbeing.
“Having children is a huge life moment and one with big implications for personal finances, but so is retirement. We are encouraged to see the Act has the potential to help with both, immediately and long-term.”
ENDS
Notes to Editor:
- People’s Partnership provides The People’s Pension, the largest independent master trust in the UK, serving nearly 7 million pension savers across the UK and managing approximately £30bn in assets. As a business without shareholders, it reinvests its profits with the aim to help customers and achieve better financial outcomes for everyone.
- https://www.legislation.gov.uk/ukpga/2006/21
- https://ifs.org.uk/news/childcare-reforms-create-new-branch-welfare-state-also-huge-risks-market
- The People’s Pension looked at the pension contributions of the 60,000 workers over the period they benefit from the Childcare Act and calculated how these would accumulate until retirement, assuming investment returns of 3.6% per annum. The calculation assumes an average childbirth age of 31 and average retirement age of 68.
- While the minimum total contribution under automatic enrolment is 8%, individuals can choose to contribute more. Many employers will match higher contributions, bringing the total up to 12% or more in some cases.
- For the purpose of these calculations, we have assumed a part-time role to be 16 hours a week.