You are going to have to start putting some money away for your retirement, or paying in more than you do now, and you are probably going to have to wait longer to get your hands on your state pension. That was effectively the message to millions of people this week when the government announced a wide-ranging review of the UK pensions system.
The independent commission it launched will grapple with a host of thorny issues and make recommendations for change.
Here are five things that might happen.
A higher state pension age
The state pension age (SPA) is the earliest age at which an individual can start getting the state pension. It is now 66 for men and women but is scheduled to rise to 67 between 2026 and 2028.
As things stand, the SPA is then scheduled to increase to 68 between 2044 and 2046, affecting those born after April 1977. However, “a faster increase is definitely on the cards,” says Rachel Vahey, the head of public policy at the investment platform AJ Bell.
Earlier this month, the Institute for Fiscal Studies thinktank put the cat among the pigeons when it warned that the SPA may have to be upped to 69 by 2049 and 74 by 2069 if the triple lock guaranteeing how much it will be worth is kept.
The state pension provides the bulk of retirement income for most pensioners, so having to wait longer for it could have a huge impact on millions of people.
Less take-home pay – but not yet
Since 2012, employers have had to enrol eligible workers into a workplace pension scheme where both pay money in – this regime is known as automatic enrolment.
The minimum contribution is a total of 8% – usually made up of 4% from the worker’s salary and 1% from the government in tax relief, plus 3% from their employer. However, most experts agree that 8% isn’t enough for a decent retirement income.
It is not yet clear what level the government is leaning towards as a new minimum but pension providers and others have long called for the figure to be raised to 12%.
Ministers have already said there will be no change to minimum auto-enrolment contribution rates during this parliament – so any increase is a few years away.
The other thing the commission will look at is possibly extending auto enrolment to younger people and those on lower incomes. It now affects everyone in work aged between 22 and the state pension age who earns more than £10,000 a year in one job and doesn’t already have a suitable workplace pension. Ministers could look at including workers aged 18 to 21, and those earning less than £10,000 a year, many of whom are not saving anything for their retirement.
More flexible pensions
For many people, retirement is an abstract thing that is a long way off, and in terms of their money, other things are much more of a priority, such as saving for a home deposit or making sure they have some cash in a “rainy day” savings account.
Part of the answer, according to some, is to make pensions more flexible. One idea gaining a lot of traction is the “sidecar savings” concept. Broadly, this would involve a small chunk of your pension contributions going into an accessible emergency fund that sits alongside your pension pot. The Resolution Foundation thinktank has suggested it could take the form of an easy-access savings account capped at £1,000, where anything above the ceiling flows into your pension.
Allowing you to withdraw some of your pension pot to put towards a house deposit is another idea being discussed. In a recent speech, Nikhil Rathi, the chief executive of the UK’s Financial Conduct Authority, said: “Australia, New Zealand, the US, Singapore and South Africa all permit citizens to leverage their pension savings to buy a first home. Some have suggested we consider, carefully, similar approaches in some circumstances here in the UK.”
A narrower ‘gender pensions gap’
Put simply, women now approaching retirement typically have roughly half the pension savings men do, with the latest government figures revealing a “stark” 48% gap. That is the typical difference between the private pension wealth of women and men who have retirement savings and are aged 55 to 59. It looks even worse when you see it in pounds: typically, these women have built up a pension fund of £81,000 compared with £156,000 for men. That equates to an annual income for a 60-year-old of about £6,000 for women and about £11,000 for men – a difference of £5,000 a year.
The government said this week that it was “committed to both monitoring and narrowing” the gender pensions gap.
Ministers could look at reducing the £10,000-a-year earnings threshold for auto enrolment because it excludes many women who hold multiple jobs or work part-time. Most experts say that it also means tackling the gender gap on pay and making childcare more affordable.
A better deal for the self-employed
Self-employed people are effectively shut out of the workplace pension system. They are not covered by auto enrolment, and they do not have an employer contributing for them.
Only about 20% of the self-employed are saving into a private pension – that means more than 3 million aren’t saving anything for their retirement.
Many believe the answer lies in a product that already exists: the lifetime Isa. This lets people – including the self-employed – put by money for a first home or for their retirement, and the government adds a 25% bonus to their savings, up to a maximum of £1,000 a year. If you don’t use it to buy your first home, you can access the money at 60.
“The 25% government bonus acts in the same way as basic-rate tax relief, and any income can be taken tax-free. There is also the ability to access money early if needed, subject to a 25% exit charge,” says Helen Morrissey, the head of retirement analysis at the investment platform Hargreaves Lansdown.
Ministers could change the rules to let people over 40 open a lifetime Isa – at the moment they can’t – and make them more appealing by cutting the 25% exit charge.