Chancellor Rachel Reeves is to launch a review of pensions (Image: Getty)
Workers could be encouraged to put more of their wages into private pension pots under reforms to be announced by Rachel Reeves, following warnings that many are set to run out of money in retirement. The Chancellor is to announce a review of pensions in her annual Mansion House speech on July 15, attended by leading figures in the financial services sector.
It will look at whether pension contributions from employees, businesses and the self-employed are sufficient, and how people who don’t currently save into a pension can be brought in to the system. The inquiry, to be led by a commission appointed by the Chancellor, was due to begin last year but had been postponed.
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Currently, four in ten employees are not saving enough to ensure they enjoy a comfortable retirement, according to a paper by the Institute for Fiscal Studies this week. It found 39% of private sector employees are not on track to reach their “target replacement rate” income, the figure they need for a standard of living in retirement similar to the one they enjoyed when they worked.
Because living costs are usually lower for retired people, this is between 80% of working-age income for lower earners and 50% of working-age income for higher earners.
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In addition, 13% of working people are not on track to receive the minimum income necessary to meet their basic needs in retirement, defined as a post-tax income of ￡13,400 per year for a single pensioner or ￡21,600 for a pensioner couple, after housing costs and living outside London.
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Increasing pension contributions could help people in later life but cause hardship for workers on lower incomes today, as it would cut their take-home incomes, the think tank said.
It also warned that changes to the pensions system introduced by former Conservative Chancellor George Osborne had given retirees more control over how their pension pots are used, which had benefited some people but also made it possible for retirees to spend all their money long before it was no longer needed.
Damon Hopkins, Head of defined contribution Workplace Savings at pensions consultancy Broadstone, said: “It is great news that the Government is getting on with its promised review of pension adequacy. A myriad of studies reveal the cold, hard truth that millions of people are set to reach retirement with inadequate defined contribution savings and urgent reform is needed to avoid this ticking time bomb.”