Workers need to know their pension pots are ringfenced from the taxman
ALAMY
Even those who are reasonably au fait with the world of the private pension sometimes recoil from looking too deeply into the reality of their own situation. Specifically that option on a Âpension provider website that predicts the annual income one can expect from an existing pot. In a few seconds dreams of endless motorhome holidays on the Continent can evaporate, replaced by fear of how one is simply going to pay household bills. It is one of life’s annoyances that a good salary is too often combined with too little in the way of free time, and when retirement arrives and time is plentiful, money becomes scarce. That mismatch gets more painful as life expectancy improves.
That is why the government’s shake-up of the auto-enrolment system is so vital. Britons are taking too long to start a pension, and when they do contributions are commonly far too low. The result is a time bomb for millions of workers in their 20s and 30s who in the second half of the century could find themselves exchanging a reasonable standard of living in employment for poverty in extended retirement. As the triple lock, with its promise to protect the absolute and relative value of the state pension, becomes unsustainable, private provision, encouraged and facilitated by the state, must take over the heavy lifting.
Created by the previous Labour government, default enrolment has been a tangible if qualified success. Torsten Bell, the pensions minister, says the scheme has resulted in some ten million more people saving into a pension than in 2012. In the past people in their 20s would have regarded a pension as a can to be kicked down the road. Now 86 per cent of people aged 22 to 29 are saving into pension pots. But there is much more to do.
Under existing auto-enrolment rules, 8 per cent of wages must be saved to a pension, 5 per cent from the worker and 3 per cent from the employer. The pensions industry believes 12 per cent is necessary. Proponents of auto-enrolment also want to see the starting age reduced from 22 to catch more people starting work. Lower-paid workers, on between £10,000 and £20,000 are in effect saving only 5.5 per cent of their earnings. This needs to change. Crucially, the scheme must be extended to the self-employed. There is also a question over how easy it should be to opt out.
With an eye to the backlash caused by the rise in employers’ national insurance contributions and the pain about to be inflicted in the autumn budget, possibly by a further freeze on income tax thresholds, the government has made clear that an increase in pension rates will not happen in this parliament. But a rise is inevitable if today’s young people are to enjoy anything like a decently funded old age: by 2041 the number of pensioners having to rent privately is set to treble.
Vital to making saving into a private pension natural and desirable is a change in perception. Everyone prefers their jam today. Ministers making the case for auto-enrolment must show that, though it is a charge on current earnings, it provides a path to a bigger income and greater freedom later in life. This is part of a debate that will only grow. Rows over winter fuel payment and cutting working-age health-related benefits are mere opening salvos in a battle over social provision that will intensify as the population ages and the ratio of taxpayers to pensioners and welfare claimants grows. Wisely, the government has brought forward a review of the state pension age, due to rise from 66 to 67 between 2026-28. Delaying a rise to 68 until the year 2044, as currently suggested, is delusional. This is not France.
Ministers must persuade young people that saving for a pension is a no-brainer. But to do so they must ring-fence the resulting pension pots to ensure they are not raided by the Treasury. If people are going to be made to save for retirement their nest eggs must be made safe from the taxman.