Latest news with #SteveWebb
Daily Mail
9 hours ago
- Business
- Daily Mail
Why isn't 8% of my salary going into my pension like it's meant to? STEVE WEBB replies
At my place of work, a big retail chain, the agreement for workplace pension contributions is 8 per cent, including 4 per cent from the employee. I work in the warehouse as a warehouse operator (not management). When I questioned HR on why 4 per cent of my wage was not being taken out, I was informed that there is a £480 (per 4 weeks) threshold and that the pension contributions start after this £480. Whenever I read up on work place pension contributions, I see it stated about the minimum 8 per cent but in reality this not correct, due to this threshold figure. My questions are: why is 8 per cent given as a minimum, and why and when did the £480 threshold come into effect? Steve Webb replies: The often-quoted figure of 8 per cent minimum workplace pension contributions is, as you rightly say, not quite what it seems. I'm happy to explain what is going on, why it was set up in this way and how it might change in future. To understand what is going on, it's worth going back to basics about what pensions are trying to achieve. One of the main reasons why we have a pension system is to help ensure that people's standard of living does not drop sharply when they no longer have a wage. To achieve this, we often talk about a target, for people on modest incomes, of securing around two thirds of pre-retirement income once you stop working. People should not need 100 per cent of their pre-retirement income because they typically no longer have 'working age' costs such as mortgage, travel-to-work or childcare costs, and also no longer pay National Insurance on their income. But a target of around two thirds would enable most people to enjoy a similar standard of living when retired to the standard they were used to when in work. The next thing is to look at how much of this will come from the state pension. As a very rough benchmark, the new state pension will replace a little under one third of the average worker's wage. This means that they need a similar amount from a private pension to bring them up to the two thirds target. When automatic enrolment was being designed, it was assumed that the first slice of earnings was fully replaced by the state pension and that what was needed on top of this was a percentage of the 'next slice' of earnings. For this reason, when the law was written to require workers and firms to make pension contributions at a set percentage rate, this percentage was applied to earnings above a floor, currently £6,240 per year. Earnings above this level (up to a ceiling of £50,270) are described as 'qualifying earnings', and the mandatory 5 per cent from the employee (or 4 per cent net of tax relief) and 3 per cent from the employer are applied to this band. I should stress that we are talking here about the legal minimum rates of contribution and that many employers and workers do more than this, including some who apply contributions from the first pound of earnings, not just on 'qualifying' earnings. Over time there has been growing concern over this system, particularly because of the impact on lower earners. To give an example, for someone who works part-time and earns (say) £12,480 – double the floor for qualifying earnings- the mandatory pension saving rate is applied to just half of their wage. By contrast someone working full time on £31,200 – five times the floor – is making contributions based on four fifths of their total wage. In response to this, a Government review of automatic enrolment published back in 2017 recommended that the starting point for contributions should be reduced to zero, so that the 8 per cent headline figure would apply to all earnings up to the ceiling, currently £50,270. Despite the general consensus about this recommendation, nothing has so far changed. In the last parliament a law was passed which paves the way for this change, but it has yet to be implemented. Unfortunately, it seems that progress on this front is probably now further away than it has ever been. The reason for this is that any widening of the band of 'qualifying earnings' would cost both workers and employers more. With concerns over an ongoing 'cost of living' crisis for many lower paid workers, and with a very substantial increase in employer National Insurance in the Autumn 2024 Budget, there is very little appetite in Government for further measures that would hit paypackets or employer costs. In short, therefore, although we urgently need to get more money going into pensions, the chances of reform any time soon look very small. The one glimmer of hope is that the Government is expected shortly to announce the second phase of its major review of pensions, and this will include the adequacy of existing pension saving rates. It is possible that such a review will eventually (again) recommend applying mandatory contributions to the first pound of earnings, not just those above a floor. But, even if it did so, I suspect that the implementation process would be protracted and could even fall outside the current parliament. Ask Steve Webb a pension question Former pensions minister Steve Webb is This Is Money's agony uncle. He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement. Steve left the Department for Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock. If you would like to ask Steve a question about pensions, please email him at pensionquestions@ Steve will do his best to reply to your message in a forthcoming column, but he won't be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons. Please include a daytime contact number with your message - this will be kept confidential and not used for marketing purposes. If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.
Daily Mail
3 days ago
- Business
- Daily Mail
Denmark's state pension age hits 70: Will the UK be next?
Denmark's move to hike its retirement age to 70 by 2040 has got people asking the obvious question - could the same happen here? As things stand now, men and women's state pension age is 66, and between 2026 and 2028 it will rise to 67. Officially, the next rise to 68 is not scheduled until the mid 2040s, which would affect those born on or after April 1977. The Government is required by law to review the state pension age periodically. However, the last two reports in 2017 and 2023 recommended speeding up the increase to 68 - and then went ignored. The next review isn't due until spring 2029, but Labour might take as little notice of any findings as the Tories. It's not as if raising the state pension age is going to become any less of a political hot potato, as money experts pointed out when we asked for their views on Denmark's decision. Meanwhile, it's worth noting that the minimum pension age for accessing workplace and other private retirement savings will rise from 55 to 57 from April 2028, Governments have in the past tended to keep the state pension and private pension ages roughly 10 years apart, so any future increases could well continue to happen in tandem. Labour might stick with 'no change' policy 'Pension ages have been rising around the developed world in the face of a combination of rising life expectancies and falling birth rates,' says former Pensions Minister Steve Webb. The UK faces major challenges in meeting the state pension, NHS and care costs of an ageing population, he says. But regarding the politics of raising the state pension age, he adds: 'Currently policy is to give at least 10 years' notice of changes, which means that increased pension ages will generate no extra revenue for at least two parliaments but will generate negative publicity straight away.' Webb, who is a partner at LCP and This is Money's retirement columnist, goes on: 'It is no coincidence that the last two independent reviews, both of which recommended speeding up the move to age 68, have so far been ignored. It is quite possible that the next review, due during this parliament, will again lead to no change in the legal timetable for increases in state pension age.' Many people don't know their own state pension age - so check 'Each government has to review the state pension age during their term in parliament,' points out Tom Selby, director of public policy at AJ Bell. 'For those looking forward to retirement that may feel like the sword of Damocles hanging over their future pension plans. However, government aren't obliged to accept the recommendations of the review and any further increases in the state pension age are likely to be gradual and a long way in the future.' AJ Bell research shows almost half of all adults under state pension age don't know when they will start receiving it, so Selby suggests checking this and using the knowledge to plan ahead. 'Once you've figured out when you might expect to receive your state pension, you can start working backwards to think about when it might be possible to retire on your private pension savings,' he says. 'If things do change and your state pension age increases by a year, then you're at least starting from an informed position and hopefully won't need to make too many adjustments to your retirement plans.' What are the options? Raise age, moderate payments, hike taxes or means-test state pension 'When is good news, bad news? When it's about living longer and the state pension,' says Stephen Lowe, director at retirement specialist Just Group. 'The good news is that as a nation we're living longer – figures for 2023 from the Office for National Statistics show the number of people aged 90-plus has doubled over the last 30 years. But the fertility rate in the UK is dropping.' Lowe says by 2050 it's projected one in four people in the UK will be aged 65 years and over, up from almost one in five in 2018. 'Here's the bad news – it means that with more people of state pension age and fewer working people, the burden of funding the state pension becomes heavier on those paying taxes. If we don't want to increase taxes, or introduce a means-tested state pension, then there are two main ways to lighten the load – either increase the age at which people receive the state pension or moderate the amount paid. Neither is a political vote winner but the problem isn't going away anytime soon so some changes seem almost inevitable.' State pension age rise will hit people who depend most on it hardest Other developed nations face similar challenges to Denmark on how to balance longer lives with a squeezed public purse, says Standard Life's retirement savings director Mike Ambery. 'The state pension age is subject to constant review and quicker, higher increases remain possibilities alongside other options like removing the triple lock or even means testing – all of which would prove hugely controversial and politically challenging. Raising the state pension age further risks hitting those most dependent on it the hardest. Lower income groups without other sources of retirement income often have shorter life expectancies and might find it harder to work into later life. Any future changes must be taken with great care, and come with plenty of notice to help people plan ahead.'
Daily Mirror
4 days ago
- Business
- Daily Mirror
HMRC's potential pension tax changes could cost UK workers £560
The proposals have been branded a 'double whammy' Millions of workers could face a tax raid on their pensions, with concerns mounting that the Treasury is planning to take funds through major overhauls to salary sacrifice arrangements. Salary sacrifice involves employees agreeing to forgo part of their gross salary in return for non-cash benefits from their employer, such as pension contributions or a company car. This setup enables both the employee and employer to save on income tax and National Insurance contributions on the amount "sacrificed". But in what has been termed "very revealing" by ex-pensions minister Sir Steve Webb, HM Revenue and Customs (HMRC) has quietly published research exploring ways to cut back tax and National Insurance perks that currently benefit those saving into workplace pensions. Industry experts say these proposals could result in the average worker being £560 out of pocket a year. The revelations emerge as Chancellor Rachel Reeves faces increasing pressure to address a gaping deficit in public finances, which could be up to £30 billion due to costly benefit commitments, escalating borrowing costs, and worldwide economic instability. The proposals, disclosed in an obscure HMRC document, probe employers' responses to three radical alterations to salary sacrifice, a mechanism employed by half of British companies to assist employees in enhancing their retirement savings by reducing their income tax and NI contributions. One potential scenario could see both tax and National Insurance exemptions completely abolished, hitting both employees and employers hard. An average worker earning £35,000 annually would lose £560, while their employer would face an additional £241 charge, reports Lancs Live. Another possibility involves only removing National Insurance relief, which would still cost workers over £200 and employers the same amount. A third, less drastic proposal, suggests eliminating NI breaks only on contributions exceeding £2,000 - impacting higher earners but potentially discouraging many from saving more. 'This would be bad for everyone'. Sir Steve Webb, currently a partner at pensions consultancy LCP, commented: "It is very revealing that HMRC has paid for research into the likely response from employers if salary sacrifice for pensions were to be scaled back. Although the research was commissioned under the previous government, the desire to raise additional revenue is, if anything, even more acute today." He added: "With a Chancellor reportedly looking to makeup a multibillion-pound hole in the public finances in her autumn Budget, this research suggests that changes to salary sacrifice are firmly on the agenda, and likely to be considered as a potential revenue-raising measure." Critics argue that such a move would deliver a 'double whammy' to savers - either contribute more to their pensions now or face a significantly smaller retirement fund in the future. Jonathan Watts-Lay from Wealth at Work, a firm specialising in retirement planning, has voiced concerns over the potential financial impact on future pensions: "It would be bad for everyone. Whether they just do National Insurance or National Insurance and income tax, the fundamental of all those scenarios is that [people] have less money going into their pension unless they up their contributions. "You're basically saying to someone you either need to pay more money, or you carry on and your pot will be smaller when you get to retirement. There's no positive impact of it. They either take the pain, or they take the pain when they get to retirement." The revelations come amid reports that high earners are increasingly turning to salary sacrifice schemes as a means to reduce their taxable income and sidestep hefty tax rates or forfeiting state benefits such as complimentary childcare. Currently, earning slightly above £100,000 can result in an effective tax rate of 60% and loss of entitlement to 30 hours of free childcare. On top of this, Labour's expanding roster of benefit commitments, which includes re-evaluating the two-child benefit limit and reinstating winter fuel payments for all pensioners, is piling on the fiscal pressure. This week, the National Institute of Economic and Social Research (NIESR) issued a warning that Reeves might need to find as much as £30 billion in the autumn Budget to fulfil her pledges, despite Labour's manifesto promise not to hike income tax, National Insurance, or VAT. Research conducted by HMRC last year, involving 51 employers and only recently published, indicates that most companies regard salary sacrifice as a crucial part of their benefits package, aiding in staff retention. Some firms pass National Insurance (NI) savings back to employees, while others absorb them. However, the response to potential reforms was predominantly negative. Employers cautioned that abolishing tax and NI breaks would "eliminate the benefit" of offering salary sacrifice altogether. Rachel Reeves, as a backbencher, once advocated for the abolition of higher rate pension tax relief in favour of a flat 33%, sparking concerns among savers that she might still support such measures. A Treasury spokesperson responded: "These claims are totally speculative. HMRC regularly commissions independent research on all aspects of the tax system. We are committed to keeping taxes for working people as low as possible."
The Independent
4 days ago
- Business
- The Independent
Millions could receive £6,000 in pension pots under ‘megafund' reform plans
The UK government plans to double the number of UK pension megafunds by 2030, potentially boosting millions of workers' retirement pots by £6,000. Reforms in the Pension Schemes Bill propose that multi-employer defined contribution pension schemes and local government pension scheme pools operate at megafund level, managing at least £25 billion in assets within the next five years. The Treasury hopes this will result in a £50 billion investment in infrastructure projects, boosting the economy and driving up higher returns for savers. Chancellor Rachel Reeves stated the reforms mean better returns for workers and billions more invested in clean energy and high-growth businesses. Former pensions minister Sir Steve Webb described it as a 'truly a red letter day for pension schemes The schemes are expected to save £1 billion a year through economies of scale and improved investment strategies, the Treasury said.
Wales Online
5 days ago
- Business
- Wales Online
DWP £140-a-week benefit with 'hidden' protection thousands could be missing out on
DWP £140-a-week benefit with 'hidden' protection thousands could be missing out on Former pensions minister Sir Steve Webb has issued a warning to thousands of people who could be missing out on a key DWP benefit which could affect their state pension Thousands could miss out on state pension cash by failing to apply for a new-style benefit with a "hidden" protection. To be eligible for the new state pension, you typically need at least 10 qualifying years on your National Insurance record, and to receive the full amount you usually require 35 qualifying years. Those who take a break from work due to illness or disability can compensate for these years by obtaining National Insurance credits instead. Those claiming certain benefits automatically qualify for these credits, ensuring they don't miss out. One such benefit is the new-style employment and support allowance (ESA). You can apply for new style ESA if you are below state pension age and have a disability or health condition that restricts your ability to work, reports Birmingham Live. Former Liberal Democrats Pensions Minister Sir Steve Webb said: "The 'credits only' award has been part of the system for decades. But information about it is scant, and people on DWP phone lines often don't even mention it. "Even if someone on the phone tells you that you aren't eligible for the benefit payments, you should still apply to get these hidden National Insurance credits. "Not doing this can leave a gaping hole in your National Insurance record and leave you short in retirement." Article continues below For money-saving tips, sign up to our Money newsletter here Mr Webb added: "If you are unable to work because of disability, it's vital to make sure you are claiming the correct benefits in order to protect your National Insurance record and to make sure you get a good state pension. "It is only by claiming either Universal Credit or what is called 'new style' ESA that you get vital NI credits. Article continues below "Even if you've been told on the phone that you may not qualify because you or a partner has too much income or savings, you should still apply simply to get the NI credits." With new-style ESA, you can get weekly payments worth up to £140.55, alongside free national insurance credits. You can read all about the benefit here.
