The new government are likely to introduce changes to the UK pensions regime: but will they go far enough? And will they be right for today’s workforce? Will the Lifetime ISA be the new normal?
When we wrote our post on Friday morning the results were still coming in from the UK local elections. By the time all the votes were counted, it was an overwhelming win for the Conservatives, who gained 563 seats: Labour lost 382 and UKIP were wiped out, losing all but one of their local councillors.
Does this mean that Theresa May is on course for an overwhelming victory on June 8th? The weekend papers certainly thought so: May heads for landslide was a fairly typical headline – although the pundits at Sky News were more circumspect, predicting a Conservative majority of just 48.
Whatever your view on the eventual result there is very little doubt that it will be Theresa May standing at the podium outside 10 Downing Street on the morning of June 9th. She will have her own mandate to push through what is looking like an increasing acrimonious Brexit, and she will also introduce significant changes to the UK’s tax and savings regimes. As we suggested on Friday, not least among these will be changes to pensions.
British people do not save enough for their retirement
The overwhelming majority of companies in the UK will now have some form of workplace pension in place. Contributions – for both employers and employees – are set to gradually rise on a sliding scale until 6th April 2019. From that date, employees will pay 4% of ‘qualifying earnings:’ employers will pay 3% and, with an extra 1% of tax relief added on, a total of 8% of qualifying earnings will go into an employee’s pension.
This still is not enough. We often talk about ‘divides’ in the UK: the North/South divide, rich and poor, right and left. In pension terms, the real divide is between those in the public sector and those in the private sector. Anyone in the public sector who has an index-linked pension (one that increases each year in line with inflation) knows how very lucky they are. Pensions like that have been funded by significant levels of contributions: between 5% and 6% of earnings from the employee and what is effectively an ‘open cheque’ from the employer, but generally reckoned to be up to 20% of the employee’s earnings.
In the long term, pensions like that are unaffordable for the public purse: everyone will have to move to what the pension industry terms a ‘defined contribution’ scheme. But what they do illustrate is the level of contribution needed to provide a truly worthwhile pension – so do not be surprised if the new government revisits the level of minimum contributions required under a workplace pension, and increase them significantly.
What else are we likely to see?
There have been plenty of questions about the pensions ‘triple lock’ in this election campaign, the commitment that pensions should rise in line with wages, inflation or by 2.5% – whichever is the highest. So far those questions have been adroitly side-stepped and the suspicion must be that the new government will ditch the commitment. It is becoming increasingly expensive to maintain, and a recent review by former CBI director-general John Cridland – appointed last year as the government’s independent reviewer of the state pension age – recommended that the triple lock be withdrawn in the next parliament.
(One doesn’t like to be cynical on a Monday morning, but nothing I have written so far will impact on MPs’ pensions. Please do not worry about your elected representative as you vote on June 8th. He or she will still be eligible for one of the best pension schemes in the world.)
Theresa May pledges to stamp down on unscrupulous bosses
There will be one piece of good news about pensions in the next parliament. We should have seen the last of employers like Robert Maxwell and Philip Green playing fast and loose with company pension schemes.
Theresa May has already announced plans to protect pensions from “unscrupulous” bosses, with increased powers planned for regulators. These will include fines for employers who deliberately underfund company pension schemes, and the powers to block corporate takeovers if the solvency of the company pension scheme appears to be threatened.
We have written previously about a 20th Century taxation system failing to cope with 21st Century businesses and about 20th Century high streets being threatened by 21st Century shopping habits.
Is this an exact parallel? Do we now have a 20th Century pensions system trying to cope with a 21st Century workforce?
A workplace/company pension is fine if you have two or three employers in your working life: if you start working for Worldwide Widgets when you leave school or university and gradually work your work up the corporate ladder. It is not fine for many of the current working population – especially younger people.
Figures for the average length of time in a job are hard to come by for the UK: in the US, it’s 4.6 years. If that figure is roughly accurate for the UK then it equates to 11 employers over a 50-year working life. Increasingly people are flipping between being employed and self-employed: the gig economy and zero hours contracts are not going to go away. Yes, it is a fantastic idea for your employer to contribute to your pension: if you have an employer and if the last employer has passed on all the paperwork to your current employer.
And here comes Lisa…
Lifetime Individual Savings Accounts – Lifetime ISAs or, colloquially Lisas – were introduced from April 6th of this year. Experts worried that the launch of the Lifetime ISA would deter young people from saving in workplace pensions – and new research from MetLife would seem to bear out those fears. It has revealed that almost 1.7m of Britain’s young people are prepared to miss out on workplace pensions in favour of Lifetime ISAs.
MetLife found that 23% of young people said saving via a Lifetime ISA would reduce how much they put into a pension: a further 9% said they would ignore a pension entirely in favour of the Lifetime ISA. With figures from the Office for National Statistics suggesting there are 18.5m people in the UK aged between 18 and 40 that 9% equals 1.67m people opting out of pensions entirely.
The Lifetime ISA: the key points
- You can save up to £4,000 a year and receive a 25% top-up from the Government on contributions: as with a traditional ISA, you can invest in cash or stocks and shares products
- You must be between 18 and 40 when you start the Lifetime ISA and the money must be used for either buying a home or for ‘later life savings:’ use it for any other purpose and you will have to pay a 25% penalty on any withdrawals.
“On the face of it, the Lifetime ISA looks like a great product for retirement, offering a big government bonus up front and tax-free benefits when you retire,”
said Richard Parkin, head of pensions policy at Fidelity International.
“But compared to a workplace pension where your employer contributes, it falls a long way short.”
But this is the problem the government faces. A Lifetime ISA is easy to understand: it remains in your name, there is no involvement with whichever company you work for, you control the contributions and it is unaffected by changes in your employment status. In short, it is a product which exactly meets the needs of a 21st Century workforce. What it does not do unfortunately, is offer a level of savings sufficient to provide a worthwhile income in retirement.
Squaring that circle is going to be very difficult for any government: but the problem has to be addressed and it has to be addressed quickly. It should be at the top of Theresa May’s to-do list.