Before last year’s election, the financial-services industry was promised, among other things, a review of the pensions and retirement savings – to find out whether the current framework was on track to provide people with sustainable incomes in retirement.
This was delivered in part when phase one was announced in July, focusing on how local-government schemes could be used to stimulate economic growth through their investments.
However, the second phase – which we were expecting by the end of last year – has been postponed indefinitely. What might this phase have delivered, and what can advisers do instead to help their clients plan for retirement?
The pensions gap
Those who have been in the industry for some time may be startled to realise that it is now more than 20 years since Lord Turner and his Pensions Commission took a long, hard look at the pension system and the gap between the provision people had for their retirement versus what they might need to live comfortably.
The Pensions Act 2008, introduced in response to the Commission’s recommendations, laid the foundations for auto-enrolment, which itself has been in place, at least for larger employers, since 2012. This has been arguably one of the biggest changes to the future retirement of UK adults in living memory.
Around 10 million eligible workers are still not in workplace pension schemes, with many of these being women, younger people and workers in the gig economy
The headline results of auto-enrolment have been startling. By 2024, 88% of workers had a workplace pension, up from 55% in 2012, with 11 million people enrolled. But that is no reason for complacency. The amounts being contributed, although higher than before, are unlikely to provide for a comfortable retirement.
In some cases, they may provide only enough retirement income to raise pensioners beyond the threshold for means-tested benefits. Around 10 million eligible workers are still not in workplace pension schemes, with many of these being women, younger people and workers in the gig economy.
Achieving the PLSA’s frequently quoted figures of £14,000 annual income for a single person to survive in retirement (not allowing for mortgage or rent costs), £31,000 for a moderate and £43,000 for a comfortable lifestyle must seem a long way off to someone aged between 45-55 with a median pot size of £75,500.
Extending auto-enrolment
This is why the way auto-enrolment works was reviewed in 2017. The review proposed that the lower limit on the salary for contributions should be removed, so that salary is counted for contributions from the first pound, and that the minimum age for eligibility should fall from 22 to 18.
‘Promises of radical reform’: Pensions in 2024
There was also a recommendation that ways to improve pension-saving participation and retirement incomes for self-employed people should be tested. These proposals actually made it to the statute book, in the form of the Pensions (Extension of Automatic Enrolment) Bill 2023.
But that’s where the story stops, because the Act only gave the government powers to scrap the lower earnings limit and reduce the minimum age, which the previous administration never got round to doing. And any suggestion that the current government might use its pension review to use these powers has been parked, along with the postponement of the second part of the review.
What might the effect of these changes be if the government chose to exercise its powers?
On the one hand, dropping the minimum age from 22 to 18 gives young savers another four years of investment potential. If this was combined with an increase in the minimum contribution rates from 8% to 12% as some (including the influential Work and Pensions Select Committee) have suggested, this could result in a big additional chunk of investment.
Clients shouldn’t rely on governments, of any political persuasion, to make sure they have adequate funding for later life
You don’t have to believe Einstein when he called compound interest “the eighth wonder of the world” to understand the importance of starting to invest early.
But there are other factors at play – whether the opt-out rate for younger people, for example, might be higher than for older age groups, given different priorities or calls on their finances.
Why advisers are so important right now
The logical conclusion of this is that clients shouldn’t rely on actions from government, of any political persuasion, to make sure they have adequate funding for later life. This is where the support and insight of an adviser is particularly important in helping them navigate their options.
It appears mandatory contribution rates will stay as they are, given that the current government is reluctant to place further burdens on employers after increasing their national-insurance contributions.
Advisers are well positioned to help their clients increase the size of their pension pots actively, whether that involves increasing contributions, utilising salary-sacrifice options, or exploring other vehicles such as trusts and annuities, rather than relying on auto-enrolment to do the job.
Ben Lester is head of distribution at Morningstar Wealth
