Ahead of the Government’s Spring Statement (15 March) PensionBee, a leading online pension provider, has identified nine key policy changes the Government could feasibly introduce to improve retirement outcomes, reduce dependence on benefits and the cost to the Government of providing those benefits, alleviate poverty in old age, further incentivise private pension saving and help to close the gender pension gap.
The policy changes it recommends would in particular benefit today’s young workers, people who take time out of paid work to perform unpaid care, older people who can’t afford to retire when they need to and older workers trying to boost their retirement pot before giving up work, with both short and long term potential benefits.
Becky O’Connor, Director of Public Affairs at PensionBee, commented: “Retirement is a cherished ambition and a huge incentive for workers throughout their lives - so the cost to the Government of people losing faith in pensions - both the State Pension and private pensions, could be huge.
If the Government is planning to take away from State Pension provision and also potentially private savings to get older people back to the workplace, it should consider how to give a little back, too.
The State Pension is a vital safety net and must be preserved at a meaningful level. However if, as seems likely, the Government chooses to increase the State Pension age from 67 to 68 sooner than currently planned, this would give rise to even greater need for increased private pension savings among the working age population, should they want or need to retire earlier than 68, because of caring needs or their own ill health, for example.
The Government might want to consider using the proceeds of any state pension savings or other tax-take boosting measures it currently has in place, such as frozen income tax thresholds, to implement measures to increase private pension savings and to give people more opportunity to retire before an increasingly distant State Pension age, if they need to. This would boost the potential for better retirement outcomes, which over time, could further reduce future dependency on the State Pension.
These measures would also be key to maintaining and improving trust in pensions in general, which is essential if people are going to keep saving for retirement.”
The key changes PensionBee would like to see are:
1. Extend automatic enrolment to 18 to 22-year olds
Reason: Aside from it generally being necessary to boost private pension provision and encourage long-term savings habits, if today’s workers will be working longer before they get the State Pension, they could also need more private pension income to fill any ‘Pre-State Pension gap’ they are likely to face, as well as provide an adequate income after they start receiving the State Pension.
The contributions made earlier in working life can be the most valuable because of compound growth. Some 18 to 22-year olds may also benefit from lower living costs, as they are more likely to still be living with parents, affording them an opportunity to put a bit more aside for the long term. If the Government is moving the State Pension up to 68 sooner than planned, then helping people boost private pension savings throughout working life could compensate for this.
2. Reduce the earnings trigger for Auto-Enrolment to capture more part-time and low paid workers
Reason: People who take time out of work to care often go part-time, including parents (often mothers) and unpaid carers of older relatives. This affects their pension pots. Not all lower paid people are unable or unwilling to put money into their pension. Increasing the scope of Auto-Enrolment to include these earners can help prevent people’s private pension savings from stopping altogether and reduce their dependence on the state pension in old age.
3. Increase Auto-Enrolment minimum contributions from 8% to 10%
Reason: The current minimum contribution amount of 8% will not be enough for most people to fund a moderate living standard in retirement (based on the PLSA’s retirement living standards work). Increasing the minimum to 10% of qualifying earnings would give people a greater chance of having a decent retirement income and would be less onerous at a time when household budgets are stretched than an increase to 12%. Announcing a clear timetable for this year for increasing contributions would be helpful.
4. Provision of affordable childcare to enable parents to build up bigger workplace pensions
Reason: For workers starting a family, the point at which childcare is required is often the point at which someone’s pension saving also stops or reduces dramatically, as they have to give up work either wholly or partly, to care for their children. This happens in part because childcare is prohibitively expensive. Better pension outcomes and a reduced gender pension gap would be an indirect but significant consequence of more spending on childcare.
5. Increase the Money Purchase Annual Allowance from £4,000 to £10,000 and thereafter with inflation
Reason: The current MPAA level of £4,000 may be a blocker for those trying to boost their pension pots in the decade or so before they reach State Pension age, whose circumstances may have changed since they started accessing their pension. Increasing it to £10,000 rather than removing it reduces the risk of people ‘recycling’ their earnings through their pension. Many people on average earnings will be unaffected, but it could be of significant benefit to a few ‘catcher-uppers’.
6. Increase the Annual Allowance to £60,000 and then in line with inflation yearly
Reason: Many highly paid workers in the NHS are leaving because they are being penalised by tax charges for breaching their pension Annual Allowance. Increasing the Annual Allowance could halt this damaging outflow. For the vast majority of workers, a higher Annual Allowance would not make a difference, as their contributions are much lower anyway.
7. Unfreeze the Lifetime Allowance limit from 2023/ 2024 tax year (sooner than planned)
Reason: The Government has said it wants to encourage older workers back to the workplace. Unfreezing the Lifetime Allowance would help to maintain an incentive for some workers to keep building their pots for longer..
8. Flat rate of tax relief of 30% to apply to all pension savings
Reason: A flat rate of tax relief of 30% could act as a stronger incentive for basic-rate taxpayers to pay into a pension, without causing too much of a disincentive for higher and additional rate taxpayers currently benefiting from 40% and 45% tax relief, respectively. However it would reduce the cost to Government of offering tax relief to higher earners.
9. Stamp duty incentives for older downsizers
Reason: To free-up housing equity and help older ‘asset rich, income poor’ homeowners to generate retirement income from their properties without relying on equity release. This would also stimulate the housing market and could generate stamp duty tax-take from younger buyers.
Table: Possible policy changes and rationale
| Policy change considerations | Automatically enrol 18 to 22-year olds who meet minimum earnings qualifying criteria to workplace pension schemes |
| Likelihood of implementation | Reasonable - because it is not hugely costly and would help to soften the blow of a State Pension age rise to 68 sooner than planned |
| Key potential beneficiaries | Young workers and people who take time out of work to perform unpaid care |
| Policy change considerations | Reduce the earnings trigger for Auto-Enrolment to capture more part-time workers in workplace schemes |
| Likelihood of implementation | Reasonable - because it is not a huge giveaway and relatively uncomplicated |
| Key potential beneficiaries | People who take time out of work to perform unpaid care and older workers who can’t afford to retire when they need to |
| Policy change considerations | Increase minimum Auto-Enrolment contributions from 8% to 10% |
| Likelihood of implementation | Unlikely - because of the cost of living crisis |
| Key potential beneficiaries | All workers |
| Policy change considerations | Provision of affordable childcare to enable parents to build up bigger workplace pensions |
| Likelihood of implementation | Reasonable - because it is a well-documented problem affecting the number of workers |
| Key potential beneficiaries | Parents of young children |
| Policy change considerations | Provision of affordable childcare to enable parents to build up bigger workplace pensions |
| Likelihood of implementation | Reasonable - because it is a well-documented problem affecting the number of workers |
| Key potential beneficiaries | Parents of young children |
| Policy change considerations | Increase the Money Purchase Annual Allowance of £4,000 to £10,000 |
| Likelihood of implementation | Likely - because of focus on older workers |
| Key potential beneficiaries | Older people trying to boost their pot before they retire |
| Policy change considerations | Increase the Annual Allowance from £40,000 to £60,000 |
| Likelihood of implementation | Likely - the impact on public sector workers is well publicised with consequences for the NHS |
| Key potential beneficiaries | Older people trying to boost their pot before they retire |
| Policy change considerations | Increase the Lifetime Allowance limit |
| Likelihood of implementation | Likely given recognition of need to improve incentives for older workers to keep working |
| Key potential beneficiaries | Older people trying to boost their pot before they retire |
| Policy change considerations | Flat rate of tax relief of 30% |
| Likelihood of implementation | Unlikely due to scale of change |
| Key potential beneficiaries | Workers who are basic rate taxpayers |
| Policy change considerations | Remove stamp duty for downsizers |
| Likelihood of implementation | Reasonable - this would be a significant change but has been backed by Saga and other industry groups |
| Key potential beneficiaries | Older people trying to boost their pot before they retire and younger workers |
