Not retiring: The pension savings conundrum

There has been a lot of talk about how to fund people living longer lives which has brought a big focus on pensions reform. While many may be able to work late into their 60s with few problems, others will face health or caring challenges that will either mean they have to reduce their hours or drop out of the workforce – unless employers are able to offer more flexible, work-from-home options.

That will affect the pension they are able to draw on. This has long been the case for women who bear the lion’s share of caring responsibilities. Taking time out to care for young children has a big impact on pension income and means there is a large gender pension gap.

One thing that has helped reduce that gap has been the ability to top up National Insurance contributions when the children are older and women can return to work full time. But caring responsibilities often increase in later life, meaning there is little room for top-ups and if you are on a low wage, particularly during a cost of living crisis, you are more likely to be cutting back on pension contributions than topping them up.

Another thing that has reduced the gender pension gap is auto-enrolment which means people who earn over a certain threshold have to contribute a certain amount of their income to their pension with their employer topping this up. That essentially means free money for employees. There has been a lot of debate about lowering the earnings threshold from 10K pounds, given those on lower pay are missing out and that many people these days have a portfolio career of more than one part-time job, each of which may fall below the threshold. The Department for Work and Pensions has confirmed its commitment to expanding auto-enrolment, but will not consult on reforms until at least the mid-2020s.

Another debate is about increasing the minimum auto enrolment pension contribution rate from 8% to 12%. A report from Phoenix Group and WPI Economics this week estimates that this could result in total additional pension contributions of £10 billion a year in the UK. It models how an increase in the rate could benefit people’s future retirement pot and investment in the UK economy, and also highlights the impact of delaying a rise. For a typical 18 year old, for instance, it says that delaying the increase by 15 years will lead to a potential £35k loss in retirement savings at state pension age.

There has been discussion on whether people should be allowed to pause their pension contributions temporarily.  The pensions industry is very divided on the issue. A survey this week by Professional Pensions found that 48% of respondents were in favour of allowing employees to pause their auto-enrolment contributions, while 46% disagreed. One respondent suggested that pauses should only be allowed for those above a minimum threshold, while another argued that pauses should be made with limitations. However, some respondents believed that allowing pauses would defeat the purpose of auto-enrolment and that the amounts being saved are minimal.

Yet we know that many are currently choosing to lower their pension contributions to pay for present rather than future costs. While there is an urgent need to save for the future, the urgent needs of the present are likely to trump that. How do we balance the two without erring too much on the side of not encouraging saving for the future? It is really an issue that is outside the confines of the pensions industry and depends on people being paid enough to live on in the present, something we are very far from achieving at the moment. Issues of housing costs, the general cost of living, insecure jobs and earnings and so forth have to be tackled in the round if we are not to store up all sorts of problems for the future.

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