The fact that current pensioners are doing relatively well has
led to a degree of complacency in policymaking. The next
government needs to take key decisions on pensions, some of them
urgently. Getting them wrong – or continuing to avoid
them – risks future pensioners ending up with a poor standard of
living and/or future state spending being higher than otherwise
intended.
This report, undertaken as part of The Pensions
Review, led by the IFS in partnership with abrdn Financial
Fairness Trust, identifies five key decisions
that should be taken by the next government:
-
Decide whether and how to provide more support to those
who struggle to work up to state pension age, while
considering the effects on work incentives and government
spending. This is urgent as the state pension age will rise
from 66 to 67 between 2026 and 2028. The next government also
cannot delay a decision on whether to accept the previous
recommendation to bring forward the legislated increase in the
state pension age to 68.
-
Put in place a long-term plan for the level of the
state pension. Current forecasts suggest that
maintaining the triple lock will cost around £1.5 billion per
year by 2029–30 relative to earnings indexation. At some point
whoever forms the next government needs to decide on the
appropriate level of the state pension and then to increase it
to keep up with earnings growth in the long run, but also at
least as fast as inflation every year.
-
Decide whether to make use of new legislation that
would increase minimum workplace pension contributions. If they
do, they need to consider how to help low earners adjust to
lower take-home pay. Going ahead would mean additional
pension contributions of £512 per year (including from the
employer and tax relief) for employees with minimum
contributions (8% of qualifying pay). For someone earning
£10,000, this would lead to a reduction in take-home pay of at
least 2.6%, and likely more depending on how much wages adjust
downwards given the policy.
-
Decide how to address the problem of low pension saving
among the self-employed. Only around 20% of
self-employed workers participate in a private pension, down
from 50% in 1998. One option could be to integrate pension
saving for the self-employed into the Self Assessment tax
system.
-
Develop and implement policies to help people draw on
their private pension wealth through retirement.
Increasing numbers are approaching retirement with significant
defined contribution pension wealth, which they can access as
they wish. They face difficult, high-stakes financial decisions
throughout retirement that could lead to them running out of
private pension wealth – or drawing on it too cautiously. One
option could be requiring pension schemes to provide default
options, to help especially those who have low understanding of
and/or engagement with pensions.
Heidi Karjalainen, a Senior Research Economist at IFS and
an author of the report, said:
“After the election the pensions minister will face a big
in-tray. Many of these challenges stem from the fact that
individuals carry a lot of risk and responsibility in today's
pension system. This allows for useful flexibility for those who
are willing and able to handle their pension wealth effectively.
But individual bad luck or bad decisions – or for some simply a
lack of making a decision – can have big adverse consequences in
a way that was much less true in the past. Failing to address the
risks that individuals face in the current system would
unnecessarily store up problems for the future.”
Mubin Haq, CEO of abrdn Financial Fairness Trust,
said
“Future pensioners will face a number of challenges with many
likely to face greater hardship due to the decline in final
salary pensions, falls in homeownership and fewer of the
self-employed saving into a pension. Labour and the Conservatives
have not fully recognised the impact this will have and that
changes take a long time to yield results. The next government
must act with a greater sense of urgency which goes beyond a
commitment to the triple lock.”
Read the briefing
here
ENDS
Notes to Editor
‘Pensions: five key decisions for the next government'
is an IFS briefing by Jonathan Cribb, Heidi Karjalainen and
Laurence O'Brien.
