How to survive the looming pensions storm: JEFF PRESTRIDGE’s masterplan to shore up your retirement

A perfect pensions storm is heading our way – and no one, young or old, is going to be spared.

That is the frightening conclusion to be drawn from the Government’s announcement on Monday of major reviews into the two pension bulwarks that underpin most people’s finances in retirement: the state pension and the work pension.

The review of the state pension will focus squarely on whether the age that people receive the benefit (currently 66) should rise faster than already planned. 

This could pave the way for people now in their 30s and 40s waiting until their 70s to get their state pension.

Separately, a newly established Pensions Commission will look at how more working adults can be encouraged to save into a pension, provided either by an employer or set up by themselves.

Although many employees are now ‘auto-enrolled’ into their employer’s pension scheme, half of working-age adults are still saving nothing. Foremost among them are low-earners, the self-employed and some ethnic minorities.

The Commission will also assess how those already saving into a pension can be nudged into tucking away a lot more. According to research by Scottish Widows, part of Lloyds Banking Group, about 15million workers face poverty in retirement unless they start squirrelling away more of their earnings into a pension fund.

While the Government chose to sugarcoat the truth somewhat by stating that ‘millions of people could benefit from a more secure retirement’ as a result of the Pension Commission’s work, Money Mail won’t.

Here, we detail what the two reviews really mean for your pension prospects, whether you’re on the pathway to retirement or already retired.

We also explain what you can do to improve your retirement finance prospects, while spelling out the many elephants that remain in the pensions room (for example, the real threat of a disincentivising pensions tax raid in the autumn Budget).

State pension

Where we are: Currently, the state pension kicks in once you hit 66. For those who have sufficient qualifying years of National Insurance contributions (typically 35), you will receive a weekly state pension worth £230.25.

About 13million people are in receipt of a state pension –although only 1.7million receive the full £230.25.

Two thirds of pensioners (men born before April 6, 1951, women before April 6, 1953) receive the old ‘basic’ state pension worth a maximum £176.45 a week.

Annual increases to the state pension are determined by the triple lock, which promises an uplift based on the higher of inflation, average earnings or 2.5 per cent.

The increase which applied from the start of the tax year in April was 4.1 per cent. Labour has so far said that it is ‘committed’ to maintaining the triple lock for the remainder of the parliament.

Where we’re going: On Monday, the Government launched a ‘review’ into the state pension age.

In a nutshell, it has asked experts to look at the appropriate state pension age for future decades, taking into account key factors such as life expectancy, fairness across generations, and the sustainability of maintaining the state pension (currently costing upwards of £140billion a year).

We already know from previous reviews that the state pension age is due to rise to 67 between 2026 and 2028 – and then to 68 by 2046.

Yet it’s conceivable that the latest review may recommend that the ratcheting up of the state pension age to 68 should be introduced more quickly.

Rachel Vahey, head of policy at investing platform AJ Bell, says a ‘faster increase is definitely on the cards’.

She adds: ‘State pension benefits are one of the single biggest expenses for the Treasury and account for more than 80 per cent of the annual £175billion pensioner welfare bill.

Without policy intervention, state pension costs are set to spiral to nearly 8 pc of Gross Domestic Product over the next 50 years, up from 5.2 per cent today.’

The Institute for Fiscal Studies (IFS) has recently argued that without reform (a dumbing down) of the pension triple lock, the state retirement age should increase to 69 by 2049 and to 74 by 2069. The review does not cover the future of the triple lock.

Raising the state retirement age is a political hot potato and leading pension campaigners such as Baroness Altmann have already voiced their opposition.

Yesterday she told the Mail: ‘I am against raising the state pension age again, certainly unless you have much better provision for those who simply cannot work longer and will otherwise be left in poverty.’

The review will not be completed until March 2029, so it is conceivable that Labour could not act on it before the next election which must take place no later than August of the same year.

What you can do: Any move to a state pension retirement age of 68 will be confirmed well ahead of its introduction (at least ten years). So there is no need to panic.

Many people in their mid to late-40s will already have one eye on retirement – and have plans in place to cope with the financial transition from full-time work, including waiting until 68 to receive the state pension. 

For example, doing some part-time work or downsizing to release equity from a home and boost the household finances.

But as Ms Vahey says: ‘The best way to give yourself freedom to retire on your own terms is to build up your private pension.’

So, if you can afford to increase the amount you are putting into your works pension or self-invested personal pension, do so now.

It will provide all-important protection against any nasty changes to the state pension, be they a later retirement age or annual payment increases less generous than those currently offered by the triple lock.

Private pensions

Where we are: Nigh on 13 years ago, auto-enrolment became a feature of the pensions landscape.

It meant most (but not all) workers became members of their employer’s pension scheme, although they could opt out if they wanted to.

Since 2019, the minimum contribution under auto-enrolment has been set at 8 per cent, based on a slice of a worker’s qualifying annual earnings (between £6,240 and £50,270).

All workers aged 22 and over are auto-enrolled, provided they earn more than £10,000 a year. The 8 per cent is split between the employer (5 per cent) and employee (3 per cent).

On one level, auto-enrolment has been a big success, with 88 per cent of eligible employees now saving into a pension. 

But it’s far from perfect. The current set-up discriminates against the self-employed, low earners (below the £10,000 income requirement) and those (women, especially) who have more than one job but none which meets the £10,000 auto-enrolment trigger.

The minimum contribution rate of 8 per cent is also considered too low, with most experts stating that it should be increased towards 12 per cent. About half of workers only save around the minimum contribution level.

The Government accepts that things need to change. It says that retirees in 2050 are on course to receive £800 less annual income from their pensions than they do today. A shocking state of affairs.

Even worse, women who are currently approaching retirement are on course to receive pension income of just over £100 a week, compared to just over £200 for men – an unacceptable 48 per cent ‘gender pensions gap’.

Jamie Jenkins, director of policy at financial mutual Royal London, describes this gap as ‘stark’. Its own research indicates that men have an average pension fund worth £92,000, compared to just £39,000 for women.

Where we’re going: The new Pensions Commission has been tasked by the Government to help create ‘a future-proof pensions system that is strong, fair and sustainable’.

It will report back in 2027, although any recommendations that the Government likes will not be implemented during this parliament. So we’re talking 2029 and probably much later if there is a change of government.

We also know that employers will not be asked to increase the 5 per cent minimum auto-enrolment contribution rate they pay into an employee’s pension for the length of the current parliament. 

Cue a collective sigh of relief from UK plc, still reeling from the costly changes made to National Insurance by Chancellor Rachel Reeves in last year’s Budget.

Pension providers and think-tanks are not short of ideas for the Pensions Commission to mull over. Most involve a rebooting of the rules governing auto-enrolment.

For example, wealth manager Quilter believes that a lowering of the qualifying age – 22 – makes great sense. 

Kirsty Anderson, retirement specialist at Quilter, says it ‘would help to embed positive savings habits early, giving more people a realistic chance of financial security in later life’.

On similar lines, think-tank IFS says the minimum age should be reduced to 16, with people enjoying pension auto-enrolment until 74 (as opposed to the current state pension age of 66).

It says this would ‘help even more in paid work to save for later life’.

Meanwhile, AJ Bell’s Ms Vahey suggests doing away with the blanket 8 per cent minimum contribution rate – and replacing it with higher rates for those on higher earnings who can afford to tuck more money away inside a pension.

What you can do: Although the Government claims that millions of people could benefit from a more secure retirement as a result of the Pensions Commission’s work, that’s pie-in-the-sky thinking.

Maybe, come 2029, the Commission will come up with some ideas that help to persuade more of us to save – and more of us to increase our pension contributions. I hope so, I really do.

But the best approach to putting in place a financial plan that will see you through retirement is to take control yourself.

Plan ahead, take advice, start saving into a pension as soon as practically possible, and don’t be frightened to engage with your pension provider.

Read the statements you receive on the progress of your pension. Indeed, crawl all over the details of your work pension and ask questions about anything you don’t understand.

Also, see if your employer will increase its payments into your pensions pot if you raise your contributions. It’s called matching and it can give your pension a big boost.

Finally, ask your employer what support they offer if you want to ensure that your wider retirement plans are on track. Some will put you in touch with a financial adviser.

Elephants in room

A Pensions Commission brimming with good ideas to get us saving more is fine and dandy.

But its work will be seriously undermined if the Government continues to look at pensions as a source of much-needed tax revenue.

Labour’s decision to bring pensions into the ambit of inheritance tax – draft legislation making this possible was published earlier this week – has been widely criticised for eroding public trust in pension saving. 

As has its refusal to rule out both a revamp of the tax relief available on pension contributions (reducing it to a flat 20 per cent) – and a reduction in the amount of tax-free cash that people can take from their pension at retirement (or when they hit 55).

Andrew Tully, technical services director at financial group Nucleus, says its research highlights the need for pension savers to ‘have trust in the long-term savings market’. That means ‘a stable tax and policy environment’.

He adds: ‘Pensions are a long-term investment and over many years, under various different governments, there have been constant changes and tinkering to the pension tax rules which deter people from engaging with the pensions system and negatively affect their confidence.’

Well said that expert. In other words, Ms Reeves, no more messing with pension taxes. Leave them well alone – and instead address the other pensions elephant in the room: public sector pensions. Ripe for an overhaul, I would suggest.

jeff.prestridge@dailymail.co.uk