Labour announces major pension review – what it means for your money
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THE government will launch a new commission to ensure workers have enough money in retirement.
Labour will bring back the Pensions Commission amid fears today's workers face a greater risk of poverty in retirement than their parents.
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Work and Pensions Secretary Liz Kendall has launched the commission amid fears people are not saving enough for retirement
Credit: PA
It comes as experts have warned that people looking to retire in 2050 are on course to receive £800 per year less than current pensioners.
The Department for Work and Pensions (DWP) said 45% of working-age adults were putting nothing into their pensions.
Work and Pensions Secretary Liz Kendall said she was turning to the Pensions Commission, to 'tackle the barriers that stop too many saving in the first place'.
The previous commission recommended automatically enrolling people in workplace pensions, which has seen the number of eligible employees saving rise from 55% in 2012 to 88%.
While the introduction of automatic enrolment increased the numbers saving, saving levels have often remained low.
Around 1-in-2 workers in the private sector only save around the minimum contribution level, which is 8% or less of earnings.
DWP analysis suggested 15 million people were undersaving for retirement, with the self-employed, low paid and some ethnic minorities particularly affected.
Around three million self-employed people are said to be saving nothing for their retirement.
Meanwhile, 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 too.
Research found those approaching retirement are in line to receive barely half the income that men can expect.
The commission will be led by Baroness Jeannie Drake, a member of the previous commission, and report in 2027 with proposals that stretch beyond the next election.
Kendall's decision to revive the Pensions Commission has been broadly welcomed by the pensions industry.
Pete Maddern, managing director for Retirement at Canada Life said: "There are many complex behavioural, social, and financial barriers that prevent people from adequately preparing for later life, and this needs to be understood and addressed before it's too late."
"The reality is that people are living longer – and while this is something to be celebrated, it also means retirement income needs to stretch further than ever before."
Meanwhile, AgeUK's Caroline Abrahams said the commission needed to address the state pension, which provides the bulk of retirement income for most pensioners.
She said: 'If we're to avoid future generations of pensioners experiencing financial hardship, we need reforms that enable more people to build a decent standard of living, and we need them sooner rather than later to maximise the numbers who can be helped.'
LABOUR PENSION REFORM
The Government is currently planning some of the biggest pension reforms in decades.
The Chancellor announced the first part of the Pensions Investment Review in July 2024 to significantly reform the pension system.
The second phase will focus on developing a future-proof plan to give every worker an adequate income in retirement.
The first phase explored new ways to boost investment, increase saver returns and tackle waste in the pensions system.
In response to the issues raised in the review, the Government published the Pension Schemes Bill in June.
The bill is currently making its way through Parliament and will help savers to combine small pension pots and help those receiving poor returns.
The second part of the review will focus on improving outcomes for "future generations of pension savers".
Under the current auto-enrolment rules, workers must pay at least 8% of qualifying earnings into their workplace pension every year.
At least 3% of this comes from employers' contributions.
A single person now needs £13,400 a year for a minimal retirement, or £21,600 if they are in a couple, according to Pensions UK.
Previous governments have been nervous to increase the minimum amount you need to pay into your pension for fear that workers may opt out of their pension scheme altogether.
Olly Cheng, Financial Planning Director at Rathbones, said: "There is a growing sense that more must be done to ensure that future generations of retirees not only survive, but thrive in retirement."
Meanwhile, raising the amount employers need to contribute would pile further pressure onto businesses, which are already having to shoulder huge rises in the minimum wage and increase in national insurance.
The pensions minister, Torsten Bell, has already ruled out forcing workers to pay more into their pensions in this Parliament.
What are the different types of pensions?
WE round-up the main types of pension and how they differ: Personal pension or self-invested personal pension (SIPP) - This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- This is probably the most flexible type of pension as you can choose your own provider and how much you invest. Workplace pension - The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%.
- The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out. These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. Final salary pension - This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year upon retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore.
- This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year upon retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore. New state pension - This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you'll need 35 years of National Insurance contributions to get this. You also need at least ten years' worth to qualify for anything at all.
- This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you'll need 35 years of National Insurance contributions to get this. You also need at least ten years' worth to qualify for anything at all. Basic state pension - If you reach the state pension age on or before April 2016, you'll get the basic state pension. The full amount is £156.20 per week and you'll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what's known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.
What do the changes mean for your money?
Currently, most workers in the UK are automatically enrolled into their workplace pension scheme.
These are usually defined contribution (DC) schemes, which give you a retirement income based on how much you pay into the pot.
The other type of pensions in the UK are "defined benefit" schemes, where workers receive a guaranteed income in retirement based on their years of service.
The review will aim to make sure workers paying into a DC scheme are saving enough money for retirement.
The review will also consider the role of the state pension in retirement income.
This means changes will not be implemented until 2029 at the earliest.
The Chancellor will appoint two commissions to lead the review into pensions adequacy and will look at auto-enrolment rates alongside the state pension.
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