Writing in anew policy paper published by the Conservative-leaning Centre for Policy Studies thinktank, ‘New Blue: Ideas for a New Generation’, Paul Masterton MP argues that a raft of new policy measures are needed to meet the needs of tomorrow’s retirees. The paper will be published at a launch event this evening hosted by Michael Gove MP.
Masterton calls for an increase in auto-enrolment contributions to 12 per cent of earnings some time in the next decade. He also wants to see state pension age increase but retirees able to access their state pension at their original SPA, subject to an actuarially-calculated reduction.
He also backs the PLSA’s retirement income targets and CPS fellow Michael Johnson’s proposals for the replacement of pensions tax relief with government matching contributions.
Masterton says: “With another Review due in the next parliament, government should begin now the detailed and practical thinking required to not only that ensure state pension provision is on a sustainable footing, but that it better reflects the modern world of work.
“Such a system should, for starters, allow people to retain their original state pension age, but at an actuarially reduced rate for early payment. This need not cost the Government money; it is common for such reductions to be cost neutral, though consideration would need to be made about how this would interact with means-tested pension credit. Administration costs could be limited by providing an individual with a single retirement quote six months prior to their original state pension age, and asking them to select whether to retire then on a lower pension, or to wait.
“Polling from the time of (the 2015) election suggests the Conservative manifesto commitment to means-test the Winter Fuel Payment actually commanded a decent level of support. YouGov found that 49 per cent thought it a good policy compared to 34 per cent who thought it bad. Even among over-65s, the numbers for and against were split evenly. This was without mentioning in the question that the savings were to be recycled into social care, which is often the primary concern of pensioners.
“The Government also foregoes more than £1bn each year in National Insurance contributions by exempting everyone above the state pension age. Many choose to stop working at this point – but the top fifth of pensioners are still receiving around a third of their income in the form of earnings.There is no good reason for these people to be paying a lower rate of tax than younger workers; the exemption should be abolished.
“Current auto-enrolment minimum contribution rates are nowhere near where they need to be to deliver decent retirement outcomes. The Government should follow the advice of the Pensions and Lifetime Savings Association (PLSA) and increase contribution rates to 12 per cent of salary in the 2020s.
“According to the PLSA, median earners saving at this level could expect an annual retirement income of around £15,000 – including the state pension – still a modest standard of living, but a big improvement.
“Beyond this level workers (especially low earners) may start opting out as the squeeze on take home pay begins to pinch. The government should therefore consider raising minimum employer contributions beyond the minimum for employees. In particular, lower earners could be given a third-way option of making a lower contribution without any corresponding reduction in their employer’s contribution.
“The way we incentivise saving through the tax system also needs to change. We currently spend around £41bn each year on income tax and National Insurance relief for pension contributions – more than the budgets for schools in England or defence.The system is also regressive, with around three quarters of tax relief on pensions going to those earning upwards of £50,000. It is a colossal misuse of public money.
“As Michael Johnson, a Research Fellow at the Centre for Policy Studies has suggested, a better system would be to have a simple at-rate bonus system for both employer and employee contributions, regardless of income tax band.
“This could, for example, involve a 50 per cent bonus on the first £2,000 saved, with a further 25 per cent available on any additional contributions up to a maximum annual limit.This would be a much more progressive system and would tilt the scales in favour of the many lower earners who struggle to build a decent retirement pot.
“We also need to do more to ensure people are thinking about their retirement earlier in life and have access to the information they need to make informed decisions.
“A recent PLSA survey found 77 per cent of people did not know how much they would need in retirement to maintain the standard of living they wanted.
“As the PLSA have argued, the UK would benefit from having a system of retirement income targets, as is currently practised in Australia. These set out a series of potential retirement outcomes – “modest retirement”, “comfortable retirement”, etc – with illustrative examples of the standard of living retirees can expect at each income level. Evidence suggests that this sort of guidance can have a significant psychological impact, encouraging people to think seriously about their retirement goals.
“The Government should look to develop such a system alongside the introduction of the long-awaited pensions dashboard. The UK’s retirement income targets could be set by the new single financial guidance body. The ideal should be to have a system whereby savers can consider their personal retirement goals alongside information about all their current pension pots, with easy access to information and advice on what the options are for meeting those goals.”