Pension reforms proposed by the Institute for Fiscal Studies (IFS) in partnership with the abrdn Financial Fairness Trust aim to help move the UK’s pension system towards one fit for future generations. The proposals have been released ahead of the Government’s own review of retirement inadequacy.
The reforms outlined in the IFS report, The Pensions Review: final recommendations, would provide a secure State Pension, increase the number of workers saving into private pensions, help those hit hardest by the rises in State Pension age, and help people to manage their pension wealth throughout their retirement.
The IFS highlighted serious problems which remain for the next generation of pensioners, despite significant improvements in recent years. These are largely the result of most workers no longer saving into defined benefit pension schemes, which pay a specific amount at retirement based on the wage you were earning when you retired, along with lower levels of home ownership. The review identified several issues that need addressing:
- Pressure on public finances from an ageing population.
- Many workers failing to save enough to have an adequate income through retirement – including most of the self-employed.
- Complex decisions over how to draw on and manage pensions through retirement.
- Increasing numbers of older people living in more expensive, insecure, private rented accommodation.
What are the recommendations?
There are various recommendations to make the necessary changes to the UK’s pension system, and they would work across the entire landscape. One of the key measures is a four-point State Pension guarantee.
The first would be to target a level of the new State Pension “as a fraction of economy-wide average earnings”. For example, the current pension is worth 30% of average full-time earnings. Once the target level is reached by using the existing ‘triple lock’, then the IFS recommends the State Pension should rise in line with average earnings growth.
The second is that the State Pension should always grow as fast as inflation, if earnings growth is below it. The IFS report stated: “This would temporarily cause the state pension to be above target. As is done in Australia, the state pension would then continue to rise in line with inflation until it returns to target.”
The third is that the Government should commit to never means-testing the State Pension, while the fourth is that the State Pension age should only rise as longevity at older ages rises.
What about private pensions?
Private pension savings are currently not sufficient for most people to reach a retirement that they will enjoy comfortably. In fact, 20% of private sector employees and 80% of self-employed workers are not saving into a private pension at all.
Even those who are saving will usually be saving into a defined contribution pension, with around 40% set to miss the standard benchmark for retirement income as the amount they will receive is based entirely on the investment performance of the pension fund. Also, many people are struggling on lower incomes so the IFS recommends avoiding the default automatic enrolment into a pension as it would mean those people have less money to take home.
Instead, it recommends removing the requirement for any employee aged 16-74 having to make contributions to their pension to receive employer contributions. The suggestion is that an employer pays at least 3% of their salary as a pension contribution, regardless of whether the employee also pays into the scheme.
To ensure those on lower earnings don’t lose too much of their monthly income, the IFS also proposes increasing the minimum default total pension contributions under automatic enrolment. It also recommends integrating pension contributions into Self-Assessment tax returns to help boost pension savings by the self-employed.
The report stated: “The proposals boosting pension contributions from employers and employees would generate an additional £11 billion per year of private pension saving (£5 billion from employer contributions and £6 billion from employee contributions). Those on course for low-to-middle retirement incomes would see the biggest boost to their incomes – by an average of 13–14% – from these reforms.”
There are further measures suggested in the report, which can be read in full on the IFS website: The Pensions Review: final recommendations.
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If you are keen to find out more about how you can improve your pension savings or help your employees with theirs, then please contact us and we will do everything we can to assist you.
