As promised, today’s Blog continues my look into the UK pensions and follows up last week’s Blog, “Can we still afford triple lock pensions?” With this week’s instalment looking at saving for retirement.
Recently published data by the Pensions Commission (PC), suggests that over 15 million of the UK’s work force are not saving anywhere near enough to have a decent level of pension income on retirement. The recent report by the Commission, set up last year by the government, is an analysis of retirement saving and warns that a number of groups could face a significant drop in their income on retirement.
The report highlighted the fact that spending on pensioner benefits, including the state pension, is projected to grow from 6% of GDP in 2024-25 to approaching 10% by the early twenty 70s. This means that it will be increasingly unlikely that the country will be able to afford the ballooning bill.
Which groups are affected?
The Pensions Commission’s report, titled: ‘Pensions 2050: evidence and future priorities’, is an interim report that has identified three groups, women, low to middle earners and the self-employed, as the individuals most likely to be at risk of being in pensioner poverty on retirement.
The report also states that within the next decade, the number of people not making adequate provision for their retirement, could rise to a staggering 20 million individuals. The worry is of course that the logical knock-on effect would inevitably mean that there is a huge risk of a lot of this group becoming reliant on state financial help in retirement.
What does the report highlight?
The report states that, “The forces shaping our society, which include longer retirements, sluggish economic growth and a slow but steady fall in home ownership, demand a renewed focus on pensions.”
It goes on to highlight a number of contributory factors:
- The percentage of the UK’s population over the age of 65, currently 19%, is projected to reach 28% by 2075
- The percentage of the UK’s population over the age of 75, is projected to double by 2075
- Since the nineteen-nineties, most organisations providing salary-based pensions, including HMG, have been withdrawing such schemes and switching to a private pension pot model, into which both the employer and employee contributes
- Employed workers’ pension pots are under-funded, in other words, individuals are not contributing enough of their salaries for an adequate pension
- Only one in 25 self-employed workers are saving for their retirement
The self-employed (SE)
The PC’s report highlighted the fact that unlike employed workers, the SE are not required to have their own pension at all. which the report states is a huge error made by successive governments, both Labour and Conservative. The report states, “There is no automatic enrolment for the 4 million self-employed workers in the UK, the inertia based pension saving system does not provide for many who need it most.“
The PC goes on to suggest that the government should introduce a similar enrolment scheme for the self-employed with perhaps a mandatory fixed percentage of a minimum of 8% of Net Profit that must be paid into a pension pot. The SE would also be required to make an annual declaration of all such payments on their self-assessment tax returns.
Female workers
The PC report states that although the share of women with private pension has grown significantly in recent years the sad fact is that the average woman’s pension pot is only 50% of their male counterparts. This lack of pension participation is a particular worry for workers in the caring profession, most of which tend to be female especially those caring for relatives at home.
The report states that the overall gender pay gap in the UK is 12.8% for all employees, meaning women earn 87 pence for every pound men earn This substantial gap opens up and widens significantly, primarily driven by women taking time out of the workforce for child-rearing or caregiving, and moving into part-time work when returning to employment.
To partly address this issue the PC report suggests an ongoing contribution by HMG for women in this situation, especially home carers, similar to the National Insurance contributions credits, currently being given to women during pregnancy and for up to 12 months after.
Low and middle earners
This group of workers are required by law to join the automatic enrolment system, which specifies a minimum of 8% of qualifying earnings (4% deduction from wages and 1% provided by the government as tax relief, plus a minimum Employer contribution of 3% to give the overall minimum total of 8%).
Many employers actually contribute significantly more than the minimum 3%, but when this happens the report highlights the fact that many of the employees with generous employers, actually reduce their own contributions, which is allowed as long as the total is a minimum of 8%. The PC strongly recommends banning this practice.
The report also highlights a major flaw in the automatic enrolment system, which allows workers to opt out. Whilst the employer is legally required to automatically enrol a new member of their workforce, the worker has the right to opt out and receive a full refund of any contributions deducted from their pay. The report recommends that this concession should be immediately withdrawn.
What do pension experts think?
A spokesperson for the non-profit organisation, Pensions Uk said: “Unless we rapidly increase the amount going into workplace pensions we are at risk of seeing whole generations facing deeply disappointing retirements or having to work on long beyond the normal retirement date. Workers deserve a pension system that guarantees against poverty in retirement and enables them to maintain a minimum standard of living. The Pension Commission most now develop a bold plan to fix this which will need to include higher employer contributions, higher workers contributions and to introduce a scheme for the self-employed.”
Accountant’s view
Pretty much everyone from the CBI to the TUC, agrees that the current state of the UK’s pensions, cannot be sustained in the long term. Why this is still an issue is down to successive governments not having had the courage to make significant changes, which whilst necessary, may be unpopular in the short term.
The underlying issue for whichever party is in power, is the fear of unpopularity if they make increased pension contributions mandatory. The only realistic solution is for the main political parties to collectively agree to what major changes are needed in the way in which most individuals save for their retirement.
Finally, and most importantly, they must implement the changes without delay. If not, the country will find itself sailing up the proverbial smelly creek without a paddle.
(The third and final part of my trilogy of Blogs on pensions, “Do you have enough pension income for a comfortable retirement?” Will be posted next week)
Millions of workers have inadequate pension provisions
As promised, today’s Blog continues my look into the UK pensions and follows up last week’s Blog, “Can we still afford triple lock pensions?” With this week’s instalment looking at saving for retirement.
Recently published data by the Pensions Commission (PC), suggests that over 15 million of the UK’s work force are not saving anywhere near enough to have a decent level of pension income on retirement. The recent report by the Commission, set up last year by the government, is an analysis of retirement saving and warns that a number of groups could face a significant drop in their income on retirement.
The report highlighted the fact that spending on pensioner benefits, including the state pension, is projected to grow from 6% of GDP in 2024-25 to approaching 10% by the early twenty 70s. This means that it will be increasingly unlikely that the country will be able to afford the ballooning bill.
Which groups are affected?
The Pensions Commission’s report, titled: ‘Pensions 2050: evidence and future priorities’, is an interim report that has identified three groups, women, low to middle earners and the self-employed, as the individuals most likely to be at risk of being in pensioner poverty on retirement.
The report also states that within the next decade, the number of people not making adequate provision for their retirement, could rise to a staggering 20 million individuals. The worry is of course that the logical knock-on effect would inevitably mean that there is a huge risk of a lot of this group becoming reliant on state financial help in retirement.
What does the report highlight?
The report states that, “The forces shaping our society, which include longer retirements, sluggish economic growth and a slow but steady fall in home ownership, demand a renewed focus on pensions.”
It goes on to highlight a number of contributory factors:
The self-employed (SE)
The PC’s report highlighted the fact that unlike employed workers, the SE are not required to have their own pension at all. which the report states is a huge error made by successive governments, both Labour and Conservative. The report states, “There is no automatic enrolment for the 4 million self-employed workers in the UK, the inertia based pension saving system does not provide for many who need it most.“
The PC goes on to suggest that the government should introduce a similar enrolment scheme for the self-employed with perhaps a mandatory fixed percentage of a minimum of 8% of Net Profit that must be paid into a pension pot. The SE would also be required to make an annual declaration of all such payments on their self-assessment tax returns.
Female workers
The PC report states that although the share of women with private pension has grown significantly in recent years the sad fact is that the average woman’s pension pot is only 50% of their male counterparts. This lack of pension participation is a particular worry for workers in the caring profession, most of which tend to be female especially those caring for relatives at home.
The report states that the overall gender pay gap in the UK is 12.8% for all employees, meaning women earn 87 pence for every pound men earn This substantial gap opens up and widens significantly, primarily driven by women taking time out of the workforce for child-rearing or caregiving, and moving into part-time work when returning to employment.
To partly address this issue the PC report suggests an ongoing contribution by HMG for women in this situation, especially home carers, similar to the National Insurance contributions credits, currently being given to women during pregnancy and for up to 12 months after.
Low and middle earners
This group of workers are required by law to join the automatic enrolment system, which specifies a minimum of 8% of qualifying earnings (4% deduction from wages and 1% provided by the government as tax relief, plus a minimum Employer contribution of 3% to give the overall minimum total of 8%).
Many employers actually contribute significantly more than the minimum 3%, but when this happens the report highlights the fact that many of the employees with generous employers, actually reduce their own contributions, which is allowed as long as the total is a minimum of 8%. The PC strongly recommends banning this practice.
The report also highlights a major flaw in the automatic enrolment system, which allows workers to opt out. Whilst the employer is legally required to automatically enrol a new member of their workforce, the worker has the right to opt out and receive a full refund of any contributions deducted from their pay. The report recommends that this concession should be immediately withdrawn.
What do pension experts think?
A spokesperson for the non-profit organisation, Pensions Uk said: “Unless we rapidly increase the amount going into workplace pensions we are at risk of seeing whole generations facing deeply disappointing retirements or having to work on long beyond the normal retirement date. Workers deserve a pension system that guarantees against poverty in retirement and enables them to maintain a minimum standard of living. The Pension Commission most now develop a bold plan to fix this which will need to include higher employer contributions, higher workers contributions and to introduce a scheme for the self-employed.”
Accountant’s view
Pretty much everyone from the CBI to the TUC, agrees that the current state of the UK’s pensions, cannot be sustained in the long term. Why this is still an issue is down to successive governments not having had the courage to make significant changes, which whilst necessary, may be unpopular in the short term.
The underlying issue for whichever party is in power, is the fear of unpopularity if they make increased pension contributions mandatory. The only realistic solution is for the main political parties to collectively agree to what major changes are needed in the way in which most individuals save for their retirement.
Finally, and most importantly, they must implement the changes without delay. If not, the country will find itself sailing up the proverbial smelly creek without a paddle.
(The third and final part of my trilogy of Blogs on pensions, “Do you have enough pension income for a comfortable retirement?” Will be posted next week)
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