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Millions must pay more into pensions to prevent retirement crisis

Pensioner
Pensioner

Private sector workers and their employers must put more money into their pensions to stave off a retirement catastrophe, ministers have been warned.

Minimum pension contribution rates need to rise immediately, from 5pc for employees and 3pc for employers to 6pc for both groups, because millions of people are not paying in enough, according to a new report.

Pensions and savings firm Standard Life, which published the report with consultants WPI Economics, said if the Government doesn’t act swiftly, the current level of contributions could lead to an increase in pensioner poverty and people running out of money in retirement.

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Gail Izat, of Standard Life, said: “We know that there’s a massive problem with people undersaving and millions who will just be reliant on the state pension, and they don’t necessarily understand in their working lives that they’re going to fall short.

“If we don’t take action now, millions of people won’t be able to achieve the retirement they want and that they believe they’re on track for. We’ll see increased levels of poverty in retirement and some won’t have enough to meet their basic needs.”

Research from the Pensions Policy Institute charity already shows the number of pensioners still renting their home could double by 2041.

The Standard Life report warns if that were to happen today, 145,000 more would be plunged into poverty, driving up spending on housing benefit by £3.5bn.

Since 2012, workers aged between 22 and state pension age who earn at least £10,000 a year have been automatically enrolled into a workplace pension scheme. By 2021, the number of eligible employees contributing had increased from 55pc to 88pc, with £33bn more saved in real terms.

A 2017 review of the system then recommended lowering the age to 18 and removing the lower wage limit, meaning employees would be enrolled from the first £1 earnt.

The Government accepted the recommendations, but has yet to implement them and the report says the delays could cost people tens of thousands in retirement income and leave many without a plan to pay for housing.

Gordon Brown sounded the death knell for final salary pensions by axing the dividend tax credit in his first Budget, despite being warned it could cost employers more than £100bn over the next 10 to 15 years.

It meant that pension funds no longer received tax relief on dividends from their investments, with the decision blamed for shortfalls in pension pots and the winding up of “gold-plated” defined benefit schemes.

The schemes provide a guaranteed income for life in retirement, along with an inflation-linked annual increase that could cost the taxpayer £2.5bn this year alone.

As a result, millions are now forced to rely on defined contribution schemes for retirement, which they could opt out of at any time.

The report says that the Government must at least introduce a gradual framework to increase contributions.

Ms Izat added: “Even though there are short term issues like the cost of living, there needs to be a commitment to a framework for gradual increases, otherwise we’ll just keep kicking the can down the road”.