A new report says that almost four out of ten private sector workers will face a financial cliff when they retire, if the current pension system is maintained.
The Institute for Fiscal Studies Pensions review concluded “decisive actions” are required to create a retirement system that is fit for the future.
The Financial Fairness Trust of abrdn and the think tank have spent the last two and a half years examining the challenges and risks facing the UK Pension System and future retirees.
In the future, fewer workers will enjoy the benefits of defined benefit pensions (or final salaries) or the home ownership security and rising house prices that the current generation has enjoyed.
The Pension and Lifetime Savings Association recommends that all retirees earn at least PS13,400 per year after taxes. This is the minimum amount recommended by the association.
The report also stated that a higher percentage of self-employed individuals are not saving enough for retirement in private pension pots.
IFS has warned against the triple lock in the pension system, arguing that it would force the poorer households to continue working longer and could push the pension age to 74.
The statement said that the increase in state pension age would need to be substantial to keep the spending on state pensions below a certain percentage of the national income.
The triple lock would require that the age of retirement for the state pension be raised to 69 in 2049, and to 74 in 2069.
The government was urged to make certain guarantees regarding the state pension. These included that it should grow at least as quickly as inflation and that there should be no means testing.
IFS made several recommendations to reform both the state pension system and private pensions, including setting employer contributions at 3% or more of salary, regardless of employee contribution.
The think-tank would like to see the age range for auto-enrolment lowered from 22 to 66 years old to 16 to 70, and the threshold of earnings lowered from PS10,000 per year to only PS4,000.
Other recommendations include:
- To encourage private pension savings, the auto-enrolment system should increase the default minimum pension contribution, especially for those earning more than average.
- Introduce new mechanisms to encourage self-employed people to save for their retirement, such as by integrating contributions towards pensions into their tax return;
- Automatic consolidation of small pension pots will be expanded to reduce the complexity for workers approaching retirement age.
- Encourage more flexible retirement products which could combine early withdrawals with security as you age.
- Universal Credit: Enhancing benefits for those within one year of state pension age.
- Increase the number of pensioners who take up means-tested assistance so that their money can go further.
The IFS stressed that employees should have better access to “high quality information and support” (on pensions) without having to pay expensive and ongoing financial advise.
It is estimated that around 20% of private sector workers and 80% self-employed individuals do not save in a private retirement plan.
Paul Johnson, IFS Director and Co-Director of the Pensions Review said that there were many reasons to celebrate. “The current retirees are, on average doing much better than previous generations.” Pensioner poverty has dropped dramatically since the 1970s and 80s. It is now below the levels of other demographic groups.
There is a danger that policymakers are complacent about pensions. “Without decisive action, today’s population of working age faces lower living standards and increased financial insecurity during retirement.”
David Gauke (former work and pensions minister and chair of review steering group) added: “Pensions require long-term planning, and ideally a wide consensus.” The proposals maintain a balance between employers, workers and the state.
“The government must provide a stable pension income. Further increases in the age of state pension should be accompanied with more support for those most affected. Both employees and employers need to gradually contribute more in order to achieve greater financial security at retirement.”
The government has introduced the pension schemes bill last month. It is intended to make it easier for people to understand and manage their pensions.
Liz Kendall, the Work and Pensions Secretary, claimed that reforms will “improve value for pensioners’ savings and encourage long-term investments in British companies”.
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