The fact that current pensioners are doing relatively well has led to a degree of complacency in policy making. The next government needs to take key decisions on pensions, some of them urgently. Getting them wrong – or continuing to avoid them – risks future pensioners ending up with a poor standard of living and/or future state spending being higher than otherwise intended. 

This report, undertaken as part of The Pensions Review, led by the IFS in partnership with abrdn Financial Fairness Trust, identifies five key decisions that should be taken by the next government: 

1. Decide whether and how to provide more support to those who struggle to work up to state pension age, while considering the effects on work incentives and government spending. This is urgent as the state pension age will rise from 66 to 67 between 2026 and 2028. The next government also cannot delay a decision on whether to accept the previous recommendation to bring forward the legislated increase in the state pension age to 68.

2. Put in place a long-term plan for the level of the state pension. Current forecasts suggest that maintaining the triple lock will cost around £1.5 billion per year by 2029–30 relative to earnings indexation. At some point whoever forms the next government needs to decide on the appropriate level of the state pension and then to increase it to keep up with earnings growth in the long run, but also at least as fast as inflation every year.

3. Decide whether to make use of new legislation that would increase minimum workplace pension contributions. If they do, they need to consider how to help low earners adjust to lower take-home pay. Going ahead would mean additional pension contributions of £499 per year (including from the employer and tax relief) for employees with minimum contributions (8% of qualifying pay). For someone earning £10,000, this would lead to a reduction in take-home pay of at least 2.5%, and likely more depending on how much wages adjust downwards given the policy. 

4. Decide how to address the problem of low pension saving among the self-employed. Only around 20% of self-employed workers participate in a private pension, down from 50% in 1998. One option could be to integrate pension saving for the self-employed into the Self Assessment tax system.  

5. Develop and implement policies to help people draw on their private pension wealth through retirement. Increasing numbers are approaching retirement with significant defined contribution pension wealth, which they can access as they wish. They face difficult, high-stakes financial decisions throughout retirement that could lead to them running out of private pension wealth – or drawing on it too cautiously. One option could be requiring pension schemes to provide default options, to help especially those who have low understanding of and/or engagement with pensions. 

Heidi Karjalainen, a Senior Research Economist at IFS and an author of the report, said:

“After the election the pensions minister will face a big in-tray. Many of these challenges stem from the fact that individuals carry a lot of risk and responsibility in today’s pension system. This allows for useful flexibility for those who are willing and able to handle their pension wealth effectively. But individual bad luck or bad decisions – or for some simply a lack of making a decision – can have big adverse consequences in a way that was much less true in the past. Failing to address the risks that individuals face in the current system would unnecessarily store up problems for the future.”

Mubin Haq, CEO of abrdn Financial Fairness Trust, said:

“Future pensioners will face a number of challenges with many likely to face greater hardship due to the decline in final salary pensions, falls in home ownership and fewer of the self-employed saving into a pension. Labour and the Conservatives have not fully recognised the impact this will have and that changes take a long time to yield results. The next government must act with a greater sense of urgency which goes beyond a commitment to the triple lock.”

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