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Age UK: State reform essential if auto-enrolment is to work

Optimistic as it sounds, 1 October may just have signalled a revolution in the way Britons approach saving for their retirement.

By 2017 every business will have to automatically contribute to and enrol all staff over the age 22 who earn more than £8,105 into a workplace pension.

When it is fully up and running, it is hoped that between six and nine million more people in the UK will have a private pension. At Age UK, we sincerely hope it will be the nudge some people need to start saving.

All the evidence indicates that Britons are not saving enough. Just 2.9 million people paid into a workplace pension last year – a drop of around 100,000 on the year before – and this brings the number of people actively saving into an occupational schme to an all- time low.

In some ways it is understandable at a time of falling living standards, but it is a deeply disturbing trend when combined with rising life expectancy. Quite simply, it means that more people are living longer after retirement than ever before , many of them struggling to survive on just a full basic state pension of just over £107 unless they are lucky or prudent enough to have other non-pension savings put aside.

Although Pension Credit provides an important income top up, only two-thirds of people who are eligible are currently claiming it. With an estimated 16.4 million people aged 65 and over by 2033, it is a stark snapshot of the future and one which the UK needs to avoid at all costs.

 Auto-enrolment is an important first step in changing the picture, enabling many, who for whatever reason have been unable or unwilling to put money aside, to begin to build up a nest egg for later life which they can use to help make ends meet or in more diverting ways.

But in order to fully live up to its potential, the Government has to go further and go further fast, rather than leave the job, as it stands now, half done.

Age UK believes if auto-enrolment is to appeal to the widest number of people, particularly those with low and modest incomes, the Government must press ahead with its plans for a flat rate pension.

We think this will alleviate the concerns of those who fear it will jeopardize any means tested benefits they receive.

In addition people would be able toget a better idea of how much money they should expect at retirement – hopefully, encouraging them to save as much as they can afford in workplace pensions.

As well as increasing the number of people saving, Age UK also thinks more needs to be done to ensure the public gets the maximum value out of their pensions. NEST, a critical part of the reforms, has been specifically designed for those on low and modest incomes – those most at risk of poverty in later life. That’s why we want to see the current restrictions on NEST contributions and transfers lifted, to make it easier for people to accumulate their pension savings in one place.

Inevitably, auto-enrolment will increase the number of people with small pension pots, especially for those who move from job to job frequently. The Government predicts that by 2050 there will be 4.7 million pension pots.

Multiple pensions are already proving an issue for some people whose savings are too modest to annuitise successfully.

Whilst we are pleased that the Government is taking action, we fear that their proposed approach of ‘pot follows member’ might mean consumers could lose out – for instance if they move from a low to high charging pension.

If the Government is to press ahead with this option, it is important that it puts in place minimum quality standards for pension schemes that receive transferred pots, so that schemes keep charges low, improve investment governance and increase transparency.

The Government is hailing auto-enrolment as a “truly radical social change” which it says means private pensions will no longer be the preserve of the wealthy few. Now is the time to build on that achievement and provide a solid basis for private saving, by pressing ahead with plans for a simpler, fairer state pension and also by ensuring that the private pensions market works as effectively as possible for people’s hard-earned savings.

Jane Vass is head of public policy at Age UK

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