Ahead of the Government’s Spring Statement (15 March) PensionBee, 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.
Targeting incentives on people who need them
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.
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 1: Possible policy changes and rationale
|Policy change considerations||Likelihood of implementation||Key potential beneficiaries|
|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||Young workers
People who take time out of work to perform unpaid care
|2. Reduce the earnings trigger for Auto-Enrolment to capture more part-time workers in workplace schemes
|Reasonable – because it is not a huge giveaway and relatively uncomplicated
|People who take time out of work to perform unpaid care
Older workers who can’t afford to retire when they need to
|3.Increase minimum Auto-Enrolment contributions from 8% to 10%
|Unlikely – because of the cost of living crisis||All workers|
|4. Provision of affordable childcare to enable parents to build up bigger workplace pensions||Reasonable – because it is a well-documented problem affecting the number of workers||Parents of young children|
|5. Increase the Money Purchase Annual Allowance of £4,000 to £10,000||Likely – because of focus on older workers||Older people trying to boost their pot before they retire|
|6. Increase the Annual Allowance from £40,000 to £60,000||Likely – the impact on public sector workers is well publicised with consequences for the NHS, though the impact for the majority of workers would be minimal||Older people trying to boost their pot before they retire|
|7. Increase the Lifetime Allowance limit||Likely given recognition of need to improve incentives for older workers to keep working||Older people trying to boost their pension pot before they retire|
|8. Flat rate of tax relief of 30%||Unlikely due to scale of change||Workers who are basic rate taxpayers|
|9. Remove stamp duty for downsizers
|Reasonable – this would be a significant change but has been backed by Saga and other industry groups and could have a number of positive side effects
|Older people trying to boost their pot before they retire
The LTA should go completely as if the boss can’t benefit then he/she is unlikely to be enthusiastic about pensions for staff other than mandatory contributions.
If the LTA persists then should be a link to stop contributions being made when the individual has a form of fixed protection. This trap needs to be removed.
Fixed sum limits should be linked to outcomes such as the living wage in order to repair the fiscal drag damage to building a pension that would give dignity in retirement.
Hopefully the Chancellor will also announce a solution to the currently unsustainable unfunded DB pension promises for 5m hugely deserving public sector workers. This £2,100bn of effectively index linked National Debt relies on the most unappreciated actuarial assumption in the country. Current contributions (£50bn pa), the DB benefits and retirement ages rely on a real (CPI+) GDP growth assumption of 2.4% – 3.5% pa. This hasn’t been achieved for decades and I suggest won’t be achieved in future. Rather than look at the PAYG State Pension “triple lock”, politicians and the media should consider this “lifetime pensions lock”. The intergenerational taxation transfer is huge and currently has arithmetic parallels with a Ponzi scheme*. An equivalent private sector deficit reduction contribution for the 2022 unachieved growth assumption would be 5p on the basic rate of income tax.
*If further tabloid headlines are required, I suggest (1) The unappreciated 11.5% public sector rise, (2) Liz Truss was right, (3) The irresponsible OBR and (4) The Partial Pensions Regulator.