Pension Commission (interim) Report out today

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82004927#Comment_82004927

The Government provides a legislative landscape for pensions and has consistently pushed DC plans at the expense of DB plans IMO because of lobbying from business to reduce their costs and risks. It was justified with terms like "freedom", employee control" and "flexibility" and we never heard "added employee cost and risk". The loudest voices came from neo-liberal management consultants and Thatcher, Blair, Brown, Cameron etc were keen to listen at the expense of workers.

The IHT changes will discourage some people from contributing more to their pensions and stop some people from starting. It certainly won't be a reason to increase DC contributions.That would not be so bad if the money went into ISAs, but I don't really see that happening. Having DC pensions under IHT is just another reason to "spend the money now".

There will be a crash…I just don't know when. If people are looking to drawdown 4% etc and are taking a Total Return approach sequence of returns risk can hammer a retirement portfolio and the effect ripples through a 30 year retirement if you have to spend capital for a few years early on. So now we get back to the asset allocation/cash discussion or maybe an annuity.

michaels

https://forums.moneysavingexpert.com/discussion/comment/82004296#Comment_82004296

So are we expecting mandating higher contributions and perhaps a return to how flexible withdrawals can be (annuities anyone)?!

Personally I don't think for a homeowning couple that two full state pensions is not too low an income. For renters not sure, depends how much of their rent would be covered by benefits. For a single pensioner it is uncomfortable lifestyle tight.

Of the (scary big number) 18m who are not contributing, are 11m of these the economically inactive so it is really only 7m (out of 44m working age adults) who are working but not contributing (still a scary big number)?

hugheskevi

Highlights for me from reading through the report are:

• Triple Lock and means-testing- it is striking that there is no discussion at all about the long-term future of the Triple Lock, just a sensitivity analysis based on low, medium, and high volatility, with an implied assumption that the Triple Lock is a permanent feature that will last into the 2040s and beyond. Given the prominence of the Triple Lock's future in pension policy, it must be a DWP instruction to the Commission not to engage in discussion about the future of Triple Lock at this time - not even a hint as to where this could go. It will be intriguing how it is handled in the final recommendations. Meanwhile, the intial report made clear that the State Pension should not be means-tested.
• Voluntary saving - Much is made of the fact that the level of the new State Pension relative to earnings is broadly where the first Pension Commission envisaged, and that automatic enrolment is also delivering broadly as hoped. The big failure has been in voluntary saving beyond the automatic enrolment minimum. This has been an issue for over 20 years now, so expect a rehash of past initiatives in the final report.
• Automatic enrolment - 71% of lower earnings in DC schemes are either at the statutory minimum contribution level, or at the statutory minimum contribution rate but applied to total earnings rather than banded earnings. Banded earnings looks to be on the way out at some point, with a move to the statutory minimum applying to total earnings, although when and how that will be achieved is unclear. Presumably, the final recommendations will call for a timetable for this, and also to increase the statutory contribution rate.
• Adequacy - the direction looks to be a greater focus on avoiding poverty at the low end of the earnings spectrum, for adequate replacement rates for median earners, and little concern for those with income above that.
• Single vs Couples - from a poverty prevention perspective, the new State Pension does a good job for couples, but less well for single folk. Hard to see what could be done here, but likely to be some thinking around it in the final report.
• Older workers - over 50 participation rate in the labour market is a problem, with large numbers inactive for one reason or another, both voluntarily and involuntarily. The report focuses on the impact on individual pensioner income of leaving the labour market early, but even when individuals have a high income, there is still an impact on production. This has been an issue for decades, and the final report is almost inevitably going to go round the loop again.
• Self-employed - only 4% of those with only self-employed income are saving into a pension, and 17% of self-employed with other income sources. Again a problem area for decades, and worth noting that the self-employed were the biggest winners under the new State Pension.
• Property and inheritance - the report highlights the much greater income needs of renters, and that the future will see a higher number of renting pensioners. Inheritance plays a role here, as some who rent most of their life will inherit property but others will not. Linked to this, the number receiving Housing Benefit will increase whilst Pension Credit recipients decline. It seems likely there will be recommendations about the future of Housing Benefit for pensioners, and how it interacts with Pension Credit.

Overall, there was very little new in the report. Everything in the report is unsurprising, and most of the problem areas highlighted have been issues for years.

It is hard to see the direction of the final report from this initial report, which could range anywhere from genuinely radical policy proposals through to a mundane rehash of policies from the last 20 years. The one area I think will feature prominently regardless of the thrust of the report will be the labour market position of the 50 to State Pension age population.

Finally, one thing I was extremely disappointed to see was in the Press Release it highlights 5 findings, one of which is:

Where employers are contributing about the statutory minimum this is largely benefiting higher earners.

That 'about' should be 'above' based on my reading of the report. This Press Release will have been prepared by many Civil Servants, Special Advisers, and maybe Ministers at DWP. Whilst it is not a serious error, it shows a concerning lack of attention to detail in the findings that none of them corrected it, if my interpretation is accurate.

michaels

https://forums.moneysavingexpert.com/discussion/comment/82005354#Comment_82005354

Thanks for the summary

I guess with any increases to the full state pension now being within income tax, the increases are less costly than might otherwise have been imagined and indeed the post tax value of the pension will not be maintained in real terms - so effectively by the back door the triple lock is already being diluted.

Speculating on direction of travel, I wonder if the comments on adequacy might pave the way for the introduction of a flat rate of tax relief that would benefit non and basic rate taxpayers at the expense of higher rate payers. One win for the govt is again that the frozen IT and lifetime allowance thresholds will be reducing the amount of money in at 40% and out at 15%. A side win of discouraging higher rate taxpayer pension saving is it brings forward taxation if people decide it is not worth deferring income until retirement for a marginal tax benefit.

SnowMan

https://forums.moneysavingexpert.com/discussion/comment/82005354#Comment_82005354

https://forums.moneysavingexpert.com/discussion/comment/82005354#Comment_82005354

I noticed that error with 'about' versus 'above' when I first read the press release, it's almost impossible to miss. While it's in the press release rather than the report itself it did indicate to me also a complete lack of care especially as it completely changes the meaning of the sentence and negates the point being made. Median employer contributions for higher earners are as high as 6% of full pay, whereas the median for lower earners are 3% and below.

The application of minimum contributions only to earnings above the lower earnings limit £6,240 (for 2026/2027) has always been a major flaw with auto-enrolment from the first report, it's implementation and onwards. I remember thinking that at the time of the first report, 20 years ago. It is strange how rarely that has ever got mentioned in the following 20 years. Some employers (4 out of 10) apply contributions to total earnings so the majority don't, and in terms of low earnings it is further skewed in that 71% of low earners (defined as those between 10 and 20K pa) have contributions less than 8% of earnings. The report says any change in contributions isn't going to be implemented this parliament and then it would need to be subject to notice and phasing so that's a significant flaw that remains in the system for the time being (reference 3.36).

monkey-fingers

https://forums.moneysavingexpert.com/discussion/comment/82005089#Comment_82005089

Sorry, I didn't mean it like that.
I'm just shocked. I'm employed via a ltd company. It makes absolutely no sense to take huge amounts of money out of a Ltd company. Unlike PAYE, the tax limits are very different.

For every pound I take in, I pay 27.7% tax up to £50k. PAYE including NI would be 21%. So anyone who says "Outside IR35 contractors are fiddling the system", just have another look at those numbers.

The numbers after that are horrendous (Corporation tax staircases after £50k and Dividend tax goes from 10.75% to 35.75%)

Over £50k of profit, the effective tax rate is a staggering 52.78% including dividend tax. I'm not even joking.

You wonder why small business owners complain that they're being shafted.

So you can understand why I whack it all into a SIPP.

NoMore

I think sole traders are the self employed who don’t contribute to pensions as much as they should not ltd company directors. Theres an argument to be made that directors aren’t self employed. Ltd company structure I think would tend to mean you have an accountant and they would probably point out the advantage of pensions to you. Self assessing there’s nobody to tell you so easy to ignore.

It’s easy for you to say well it’s obvious to put more into pension however it is not that obvious to lots of people don’t assume because you can see the advantages that everyone can.

Moonwolf

I can see two things in particular put people off saving into a pension other than simply not having enough money. One is definitely true, the other is oft repeated although there is never direct evidence the government is thinking of it.

The first is that small levels of pension savings can cost people pension credits. It would appear a private pension of more than £3000 a year is required to offset the loss of pension credit. For low earners and those earning intermittently, perhaps because of childcare, is the risk of being worse off worth it?

The second is the wide belief that the state pension will become means tested at some point in the future. Lots of people seem to believe this, partly prompted by opinion pieces in the press. I’m not sure how to fix this as currently no government can tie the hands of a future government so no government can promise that this would never happen. Currently it seems illogical and would certainly be very difficult and expensive to administer while people can flexibly draw down. It would also be counterproductive in terms of encouraging pension savings.

monkey-fingers

https://forums.moneysavingexpert.com/discussion/comment/82005731#Comment_82005731

Even those though who are self-employed and self assessing, I don't understand why you wouldn't prepare for your future?

I was taught that a pension is absolutely key from my early 20s. My Mum has no pension and it bothers her and it's one of her biggest regrets - she was self-employed too.

NoMore

https://forums.moneysavingexpert.com/discussion/comment/82005886#Comment_82005886

As the report demonstrates, people don't prepare, just because you don't understand why they don't, doesn't mean it doesn't happen. It could be a variety of reasons, self employment is fragile, ignorance, misinformation, worry, lack of disposable income. Hopefully they will come up with suggestions to encourage those people to think about there future.