Policy changes needed to avoid generations of pension inadequacy

This means pension responsibility is placed increasingly on the individual rather than the employer, which is not necessarily a bad thing if they are equipped to make decisions with a support framework.

We now need to consider how to build on the initial success of auto-enrolment. We have seen issues arise that need to be ironed out to better suit today’s workforce, which is more dynamic and has a higher life expectancy than previous generations. 

We now need to consider how to build on the initial success of auto-enrolment. We have seen issues arise that need to be ironed out to better suit today’s workforce, which is more dynamic and has a higher life expectancy than previous generations

Auto-enrolment changes needed

Being sensitive to the devastating impact that the pandemic has had on both employers and employees, it is time we planned the approach and implementation date for the mid-2020 proposals that will remove the lower earnings band so that contributions are calculated from the first pound of earnings and reduce the age of eligibility to 18. We must then look at contribution levels.

Our 2020 research found that saving 12 per cent of full salary a year might provide sufficient income for two-adult households to experience a moderate retirement with the addition of full state pensions.  When we consider generational differences such as homeownership the story changes.

The 12 per cent figure is just about adequate for those who reach retirement without mortgage payments or rental costs. But homeownership is being reached later in life, meaning many will continue to pay mortgage repayments in retirement and fewer people reach homeownership at all.

Recent statistics suggest a third of millennials will be lifetime renters, and we expect this figure to be even higher for Generation Z.

Lifetime renters will face higher living costs in retirement, as well as having no property equity to use. Therefore they need to be saving more than the 12 per cent to accrue enough to sustain a decent retirement.

The Investing and Saving Alliance’s research shows that a lifetime renting household can expect to run out of private pension savings 12 years before a household that owns its property at retirement.

Scrap lower earnings limit by 2027

We must remain sensitive to current financial positions resulting from the pandemic but, recognising the time required to effect policy change, we need to initiate discussions to implement a future schedule of incremental change.

We propose that by 2027 the lower earnings limits is scrapped and contributions increase by 0.5 per cent a year, initially for employers only so that after six years we reach 12 per cent of full salary — split evenly between employees and employers.

Fortunately, Gen Z has a long time to save. If we begin to implement these changes this decade, the youngest workers will be able to commence their pension saving from age 18 and will have around 40 years of compound interest to gain.

This gives Gen Z a real opportunity to reach retirement with the pension pot they need. The longer we defer these decisions, the greater the likelihood more generations will reach retirement with inadequate savings.

MPAA rules must be revisited

Sadly, not everyone has the time to turn their financial position around. The over-fifties are some of the worst hit by the impact of Covid-19. Many of this group will struggle to get back into work or may be forced into part-time work, significantly impacting their ability to continue saving adequately.

We need to consider ways that help provide support for this group. One area that needs addressing is the money purchase annual allowance, which restricts tax-relievable pension contributions once a pension has been flexibly accessed.

Contrary to what some may think, the restriction that the MPAA brings is not just limited to higher earners. Many workplace schemes have generous employer pension contributions, and it is quite conceivable that a median full-time salaried employee earning £28,000 would breach the MPAA.

Unless the limit or recycling rules are revised, an increasing amount of people will be restricted from making the contributions they need, in order to bridge shortfalls and replenish funds withdrawn to cover temporary household income reductions.

Pension inadequacy does not need to be a reality. Let us ensure auto-enrolment remains relevant against a constantly changing backdrop of working patterns, personal wealth and tax.

Renny Biggins is head of retirement at The Investing and Saving Alliance