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Find out moreWritten by Retirement Line
As the UK nears the general election on 4 July, the Institute for Fiscal Studies (IFS) has highlighted five crucial pension-related decisions that the next government will need to address.
With state and private pensions being the primary sources of income for individuals over State Pension age, pension policies are a critical issue. There is, therefore, significant interest in the pension reforms being proposed by the main parties, and how these proposals will impact our retirement security.
The report by the IFS sheds light on the urgent policy decisions needed in the upcoming parliament, and the long-term strategies that cannot be delayed without risking future complications. Here’s a summary of the key points:
The next government faces crucial decisions regarding support for those who will be unable to work until they reach the higher State Pension age. With the age set to rise from 66 to 67 between 2026 and 2028, the IFS says that the issue requires urgent attention to balance work incentives and government spending.
Moreover, the IFS says the government will have to finalise the timing for raising the State Pension age again to 68. Accepting the previous recommendation to bring forward this policy to the late 2030s would require the government to notify those affected within the next few years, it says. This adheres to the current commitment to provide at least ten years' notice of any change.
The triple lock guarantees that the State Pension increases annually by the highest of inflation, wage growth, or 2.5%. While this policy has protected pensioners from inflation, its long-term financial sustainability is under scrutiny.
The IFS says in its report: “Current forecasts suggest maintaining the triple lock will cost around £1.5 billion per year by 2029–30 relative to earnings indexation.” The report suggests a ‘better way forward’ where the government decides on an appropriate level of State Pension linked to earnings growth, but with a commitment to increase it by at least inflation every year.
The IFS also says that the next government must decide whether to proceed with planned increases in minimum pension contributions. Timing and adjustments to support low earners facing reduced take-home pay are key considerations.
The Pensions (Extension of Automatic Enrolment) Act was passed in 2023 but has not yet been implemented. It extends automatic enrolment to 18- to 21-year-olds and removes the lower earnings limit for qualifying earnings. The IFS report states that this change could result in someone earning £10,000 per year seeing a minimum 2.5% (£250) reduction in take-home pay.
The IFS says that the next government needs a long-term strategy to boost pension savings among the self-employed, who currently have low participation rates. Only around 1 in 5 (20%) self-employed workers are in a private pension, down from half (50%) in 1998.
According to the report, more employees earning less than £10,000 (i.e. below the auto-enrolment start point) are saving in a pension than self-employed workers.
To address this, the IFS suggests that measures are needed to make pension saving for the self-employed simpler, potentially by utilising the Self Assessment tax system to collect contributions.
The IFS argues that although the 2015 'pension freedoms' gave more flexibility to savers, they increase the risk of people outliving their savings. The reforms also mean that some people may have to make important decisions about their pensions in old age, when their cognitive function might be declining.
To resolve these issues, the IFS states that the next government should implement policies to better help individuals manage their private pensions. It suggests that pension schemes could be required to offer ‘decumulation pathways’, with default options for those who are less able to understand pensions, or who engage at a low level with their pensions.
Sources:
The five crucial decisions the next government must make: Pensions: five key decisions for the next government. Institute of Fiscal Studies. Accessed 25 June 2024.
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