Millions face poverty in old age as govt told make huge pension change | Personal Finance | Finance

Martin Lewis explains benefits of workplace pension

Millions face poverty in old age without a radical shake-up in workplace pensions, including big increases in contributions from middle income workers, according to the Institute for Fiscal Studies (IFS)

The respected think-tank suggests employers should make contributions to staff pension schemes even when the employee chooses not do – or is unable to afford to do so.

It also agues that workers as young as 16 should be automatically enrolled into business pension schemes to allow them a longer working career to build up a meaningful nest egg.

The IFS calls for a new regime to ensure workers earning more than £35,000 to increase contributions into their pensions from the current figure, which is equivalent to 8 percent of their income, to 12 percent.

The employer would cover 3 percent of this pension contribution, which means the amount paid by each worker to their pension pot would rise from 5 percent of salary to 9 percent, although this cost would be mitigated by tax relief.

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The minimum standard of living is defined by the Pensions and Lifetime Savings Association (Image: Getty)

Currently, between 30 percent and 40 percent of private sector employees paying in to defined contribution (DC) pension schemes are on course to fall short of the income benchmark needed for a comfortable old age.

The minimum standard of living is defined by the Pensions and Lifetime Savings Association and is now set at £14,400 for an individual and £22,000 for a couple but will grow alongside average earnings.

IThe IFS said that implementing its recommendations, as well as several other reforms, would boost retirement incomes by between 12 percent and 16 percent – the equivalent to £1,400 and £2,100 a year.

The review – carried out with the abrdn Financial Fairness Trust – said the age range targeted by automatic enrolment in workplace pensions should be widened to 16 to 74 to help more people in paid work save for later life. Currently, workers are not automatically enrolled in these schemes until they reach 22.

Laurence O’Brien, a research economist at IFS and an author of the report, said: “Too many private sector employees appear on course to end up on a low – or disappointing – retirement income.

“While there is often concern about savers not saving enough, an additional problem is that despite automatic enrolment boosting workplace pension membership, more than one in five private sector employees are still not saving in a pension.”

David Sturrock, a senior research economist at the IFS and co-author of the report, said: “There is a strong case for almost all employees to receive an employer pension contribution, irrespective of whether they make a contribution themselves.”

Mubin Haq, chief executive of the abrdn Financial Fairness Trust, said: “Guaranteeing 3 per cent from the employer regardless of whether an employee makes a contribution could boost employer pension contributions by £4billion per year. This would particularly benefit women, those working part-time, young adults and the low paid.”

Tim Gosling, head of policy at People’s Partnership, provider of the People’s Pension, said: “The IFS’s focus on mitigating concerns about the affordability of increased pension saving for lower earners is very welcome. Workplace pension policy has to work at all points in the earnings distribution.”

A Department for Work and Pensions (DWP) spokesperson said: “We will ensure the pensioners of tomorrow have the dignity and security they deserve in retirement as we carry out our landmark pensions review to boost investment, increase pension pots and tackle waste in the pension system.

“More than 15 million savers could benefit from our new Pension Schemes Bill – with the potential for an average earner to have £11,000 more in their defined contribution pot by retirement.”

Millions face poverty in old age without a radical shake-up in workplace pensions (Image: Getty)

Gary Smith, Financial Planning Partner and retirement specialist at wealth management firm Evelyn Partners, said: “‘The IFS report reveals widespread shortfalls in pension saving for people across the income range.

“This is why every saver needs to think individually about what income they need or want in retirement and set about a savings plan to achieve that based on their life circumstances. While we would always urge savers to err on the generous side when estimating what size pension pot they will need, those who are due to have no housing costs when they finish work and a substantial inheritance will have drastically different needs to someone for whom the opposite applies.”

Jon Greer, head of retirement policy at Quilter, said: “The IFS’s suggestion to ensure employees receive an employer pension contribution of at least 3 percen of total pay, irrespective of their own contributions, is worth consideration.

“This would benefit the 22 percent of private sector employees who either opt out of their pension scheme or are not automatically enrolled due to low earnings. However, there is a risk that this could lead to more employees opting out of making their own contributions. A trial approach, as suggested by the IFS, could be a prudent way to assess the impact before full implementation.”

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