The possible pension changes that workers need to know about

Yahoo

21-07-2025

After nearly 20 years, the government is bringing back the Pensions Commission to tackle the growing threat of retirement poverty.
Ministers are set to resurrect a commission after nearly 20 years in a bid to reform the UK's pension system, amid fears that many of today's workers face poverty in retirement.
Experts warn people looking to retire in 2050 are on course to receive £800 per year less than current pensioners, while 45% of working-age adults are putting nothing into their pensions, the Department for Work and Pensions (DWP) said.
With this in mind, work and Pensions Secretary Liz Kendall is now turning to the Pensions Commission, which last met in 2006, to 'tackle the barriers that stop too many saving in the first place'.
'The original Pensions Commission helped get pension saving up and pensioner poverty down," said Pensions minister Torsten Bell. 'If we carry on as we are, tomorrow's retirees risk being poorer than today's."
The commission's work marks the second phase of a wide-reaching government review into the pensions system, the first half of which looked at investment and how to ensure "greater returns" for savers. Phase two will focus on improving pension adequacy.
Kendall also confirmed that the next statutory government review into when and how to raise the state pension age will start work now.
Here, Yahoo News takes a look at what changes we could expect the Pensions Commission to consider.
What is the Pensions Commission?
The original Pensions Commission was set up in 2002 and is regarded as having huge influence over the UK's pension landscape.
Among the most significant reforms resulting from its work are the automatic enrolment onto workplace pensions and the reduction of qualifying years for the full basic state pension to 30 years for men and women.
The Resolution Foundation said the commission has "already transformed living standards for current and future pensioners for the better", but that "the job is not yet complete".
In particular, the think tank calls on the new commission to boost "future generations' living standards in retirement" and tackle the "equally pressing 'rainy day' savings challenge people face today".
Below are some changes we could expect the commission to consider.
Changes to auto enrolment
While we don't know exactly what the commission will recommend, it is expected to look at ways of widening the scope of automatic enrolment.
The Resolution Foundation said the current "one-size fits all system" is in need of reform, adding: "Some low-earners may be saving more than they can afford, or need to, while others – particularly middle and higher earners – are still saving too little."
Analysis by the think tank finds that under the current State Pension and auto enrolment policy with an 8% default contribution rate, the typical earner can expect to replace just 51% of their pre-retirement earnings.
The commission will have to balance this challenge with the present-day needs of workers with families, one-in-three of whom have savings of less than £1,000, the foundation said, stressing the need for "greater flexibility".
The Institute for Fiscal Studies (IFS) proposes increases in default contributions be "targeted at middle and higher earners".
"In addition, pension participation should be extended by providing employer contributions to almost all employees, even those who do not make an employee contribution," the think tank adds.
Suggesting that there is a balance to be struck, Helen Morrissey, head of retirement analysis at Hargreaves Lansdown told Yahoo News: "We don't want to be in a position where lower earners see their contributions hiked to the extent that they struggle in the here and now.
"Similarly, we don't want higher earners to save at minimum levels and receive a nasty shock when they get to retirement and realise their pension will not sustain the lifestyle they have been used to."
Under current workplace pension auto enrolment rules, 8% of an employee's eligible earnings go towards their pension – 5% from the employee, and the employer adding 3%.
Encouraging self-employed to save for retirement
Morrissey said the commission also needs to decide "how to get groups such as the self-employed to save more for retirement".
Self-employed people aren't covered by auto enrolment, don't benefit from employer contribution, and may be hesitant to put money away until at least the age of 55 due to volatile earnings, she added.
For this reason, economists have suggested that the commission could consider finding a way to bring the self-employed into the auto enrolment system.
One solution made last year by David Sturrock, a senior research economist at the IFS, is for self-employed people to be given an active choice over whether to save into a pension or LISA (lifetime ISA) when filing their tax returns.
Another option, he said, would be for the government to enrol them automatically into a long-term savings plan, from which they could opt out.
Triple lock 'out of scope'
Liz Kendall has confirmed the commission will not be looking at changes to the triple lock on state pensions.
The triple lock is a mechanism that means state pensions will rise every year by 2.5%, CPI inflation, or the rise in average earnings, whichever is highest.
'The triple lock is out of scope of the commission. We've got a very clear commitment to that for the entirety of this Parliament," the work and pensions secretary said.
'And what we're asking the commission to do is genuinely look medium to longer term, the middle of this century, and how the state pension and second pensions work together.'
Improving adequacy and equality
With four in 10 working age adults not on track to meet the target retirement income (two-thirds of pre-retirement pay), the commission will be looking at ways to improve this figure.
DWP analysis suggests 15 million people were under-saving for retirement – particularly the self-employed, lower earners and some ethnic minorities.
Only a quarter of people on low pay in the private sector and the same proportion from Pakistani or Bangladeshi backgrounds are saving.
Women face a significant gender pensions gap, with those approaching retirement in line to receive barely half the income that men can expect, the commission's terms of reference says, suggesting that bridging these gaps will also be on the commission's agenda.
Morrisey said the Commission's work can "give the government the opportunity to take a long-term view and look at how the state pension and the triple lock's role within it need to evolve to ensure it remains sustainable and people can plan for their futures with confidence".
One potential reform she suggests is the use of a Living Pension, similar to a Living Wage, as a "minimum income underpin" with targeted salary replacement rates over this to ensure people meet adequate saving targets.
Tom Selby, director of public policy at AJ Bell, suggests the government could be limited, telling Yahoo News: "It is hard to imagine hiking minimum contributions – hitting employers and employees in the pocket in the short term – will be on the agenda during this Parliament."
AJ Bell's head of public policy Rachel Vahey warned: "Raising employer contribution requirements would likely face a business backlash, with employers having recently shouldered huge rises in the minimum wage and an extra £25bn a year in national insurance costs."
Read more
Small pension pot rules and loopholes: what are they and how do they work? (The Telegraph)
People need an annual income of £44,000 in retirement for comfortable lifestyle (Daily Record)
'I retired to Spain and live on the state pension. I could never afford it in Britain' (The Telegraph)
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