Ministers have been advised that private sector workers and businesses must contribute more to their pensions to avoid a retirement crisis.
Urgent Reforms Needed to Bolster Pension Contributions
According to a new analysis, minimum pension contribution rates must be raised immediately from 5 percent for employees and 3 percent for employers to 6 percent for both groups, because millions of people are not contributing enough.
Pensions and savings provider Standard Life, which co-authored the research with consultants WPI Economics, warned that if the government does not act quickly, the present level of contributions could lead to increased levels of pensioner poverty and people running out of money in retirement.
Gail Izat, of Standard Life, stated: “We know that there’s a massive problem with people undersaving and millions who will just be reliant on the state pension, and they don’t necessarily understand in their working lives that they’re going to fall short.
“If we don’t take action now, millions of people won’t be able to achieve the retirement they want and that they believe they’re on track for. We’ll see increased levels of poverty in retirement and some won’t have enough to meet their basic needs.”
According to research from the Pensions Policy Institute charity, the number of elderly who still rent their homes is expected to treble by 2041.
According to the Standard Life research, if this happened now, 145,000 more people would fall into poverty, increasing housing benefit payments by £3.5 billion.
The Importance of Implementing Pension Reform for Future Financial Security
Since 2012, employees aged 22 to state pension age who earn at least £10,000 per year have been automatically enrolled in a workplace pension system. By 2021, the number of eligible employees contributing has climbed from 55 percent to 88 percent, saving an additional £33 billion in real terms.
A 2017 assessment of the system advocated raising the age to 18 and eliminating the lower pay cap, so that employees would be registered from the first £1 earned.
The government approved the recommendations, but has yet to implement them. According to the report, the delays could cost people tens of thousands of dollars in retirement income and leave them without a plan to pay for housing.
Gordon Brown rang the death knell for final salary pensions by eliminating the dividend tax credit in his first Budget, ignoring warnings that it might cost companies more than £100 billion over the next ten to fifteen years.
It indicated that pension funds no longer benefited from tax breaks on returns from their investments, and the decision was blamed for pension pool shortfalls and the closure of “gold-plated” defined benefit plans.
The programmes promise a lifetime income in retirement, as well as an inflation-linked annual raise that could cost taxpayers £2.5 billion this year alone.
Ms Izat continued: “Even though there are short term issues like the cost of living, there needs to be a commitment to a framework for gradual increases, otherwise we’ll just keep kicking the can down the road.”