The changes come amid a sweeping reform of the pensions sector by the Labour Party government.
The changes come amid a sweeping reform of the pensions sector by the Labour Party government.
All the changes coming to both Department for Work and Pensions (DWP) state pensions – and private pensions – have been revealed. The changes come amid a sweeping reform of the pensions sector by the Labour Party government.
One of the most eye-catching changes has been the risk of a bigger increase in the state pension age. The move could see pensioners at risk of having to retire later.
The government announced a wide-ranging review of the UK pensions system las tweek. The independent commission it launched will explore a host of controversial and contentious issues and make recommendations for change.
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A higher state pension age
The Government plans to increase the State Pension age from 66 to 67 between 2026 and 2028. This would affect those born on or after 6 April 1960.
A further increase is planned to raise the State Pension age from 67 to 68 between 2044 and 2046, but this may be brought forward.
“A faster increase is definitely on the cards,” says Rachel Vahey, the head of public policy at the investment platform AJ Bell.
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.
Take-home pay
Employers in Australia must currently contribute 11.5 per cent of employees’ salaries to their pension, a figure set to rise to 12 per cent in 2025. In comparison, the total minimum contribution in the UK is 8 per cent, however employers only need to contribute 3 per cent.
Pension providers and others have long called for the figure to be raised to 12%. Nigel Peaple, director of policy and advocacy at the PLSA, told People Management his organisation has long advocated that the minimum pension contribution should rise from the current 8 per cent of earnings to 12 per cent.
He said: “To minimise the impact on savers and employers, the increases should happen gradually, as they did in Australia, with employers paying more so that, by about 10 years from now, both employers and employees would pay the same.
“This approach of a 50/50 split between employers and employees would strike a fair balance; it would involve higher contributions for employers compared to the current UK rules but much lower ones than traditional UK pensions in which the employer usually paid around two thirds of the cost.”
More flexible pensions
An idea gaining support is the “sidecar savings” concept. There are different ways of designing a sidecar account. Two proposed models are the two account and in plan models. In the two account model, the saver has a workplace pension and signs up to a separate savings account with a savings provider.
The saver sets a savings cap on the sidecar account. The savings provider instructs the employer tomake contributions into the sidecar until the savings cap has been reached. Once the cap is reached, further savings are rolled into the pension on top of the normal pension contributions.
If money is withdrawn from the sidecarthen the saver restarts saving into the sidecar until the cap is met again. In the in plan model the employee signs up to save with their employer. The employer pays a pension provider the total contribution made by an employee to a workplace pension as well as emergency savings account.
The pension provider divides the contribution between the pension account and the emergency savings account.
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.”
‘Gender pensions gap’
The government said this week that it was “committed to both monitoring and narrowing” the gender pensions gap.
The gender pension gap has risen to a “stark” 48 per cent, figures from the Department for Work and Pensions (DWP) have revealed.The data, shared alongside the news that the government was ‘reviving’ the Pensions Commission to address undersaving concerns, estimated that the median uncrystallised wealth of those aged 55 to 59 in 2020 to 2022 was £81,000 for women and £156,000 for men.
Self-employed
Only about 20 per cent of the self-employed are saving into a private pension – with many saying the Lifetime ISA is the answer. Ministers could change the rules to let people over 40 open a lifetime Isa and make them more appealing by cutting the 25% exit charge.
“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.
