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