Financial advisors often say it’s never too early to start thinking about your retirement. And with good reason. Just ten years ago, less than half of all UK employees were economy in a workplace program, leaving many at risk of poverty in retirement.
Then in 2012, automatic registration has been presented. This meant that employers were obliged to enroll eligible employees (over the age of 22 and earning over £10,000 a year) into a pension scheme, with contributions from both sides.
Since then, retirement savings have exploded, with 78% of employees (19.4 million people) actively saving in 2020, compared to 47% in 2012.
Working to make a difference in the world, but struggling to save for a house. Trying to live sustainably while dealing with mental health issues. For those of us in our 20s and 30s, these are the types of issues we face every day. This article is part of Quarter Lifea series that explores these issues and offers solutions.
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But the vast majority of these new savers are still doing so at levels unlikely to provide adequate income later in life. Although income needs vary, the evidence suggests that up to 12 million people are currently not saving enough for their retirement.
And as pension rights accumulate in the workplace, they tend to reflect persistent labor market inequalities. Here are four reasons why workplace pension plans aren’t as fair as they could be.
1. Earnings and Status
Many people are excluded from occupational retirement savings because they do not meet the criteria for automatic membership. Recent data found that in 2020, full-time employees earning between £100 and £199 a week had the lowest occupational pension coverage at 41%, compared with 65% of those earning £200 to £299 a week.
Overall, women, minority ethnic groups, people with disabilities, carers and service workers are less likely to have access to occupational pensions due to underemployment and low wages.
Part-time employees were also disadvantaged compared to full-time employees, who were 1.5 times more likely be part of a pension plan. People working multiple part-time, low-paying jobs are unlikely to qualify for occupational pensions, even if they earn more than the £10,000 threshold in total.
2. Expensive breaks
For most working savers, retirement income depends on the level of contributions made, as well as investment returns over the lifetime of the pension. Not making regular contributions not only forfeits the amount in the pot, but also the accumulated investment gains.
This means that any work disruptions will have a significant effect on the size of the retirement pot. Research has found that not participating in a pension between the ages of 30 and 40 can reduce this pot up to 32%.
Women are particularly affected. Not only do they take breaks to have children, but the lack of affordable childcare often reduces their chances of returning to work, which affects their eligibility for automatic enrollment. In 2019, almost 30% of mothers said they had reduced their working hours because of childcare, compared to only 5% of fathers.
Even when eligible for automatic enrollment, many women opt out due to high childcare costs. My research advocates for better financial solutions that take into account all employment experiences and family responsibilities.
3. Regressive tax breaks
Salaried savers benefit from a tax deduction on the contributions paid by themselves and their employer. They also benefit from tax-exempt capital of up to a quarter of their retirement kitty. These tax breaks are widely seen as an incentive to save.
But these forms of tax breaks are regressive, as those with higher wages benefit more. About half of all tax breaks on occupational pensions go to those in the top 10% earners; one-tenth of this aid goes to bottom 50% employees.
The occupational pension tax system effectively subsidizes retirement security for those who are already well off. Since the cost of uncollected tax on employer pensions is estimated to be over £20 billionthe money could be better targeted to those who need it.
4. Challenges for young people
As automatic affiliation only applies to people aged 22 and over, many young people are excluded from occupational retirement savings. In 2020, only 20% of 16-21 year olds benefited from a professional pension compared to 80% of 22-29 year olds.
Despite the positive effect of automatic enrollment on participation rates among 22-29 year olds, the lack of defined benefit coverage among younger groups means that they have to save more or for longer than older groups. to ensure an adequate retirement. It is believed that up to 36% of younger groups are under-saving for their retirement needs.
My research shows that many young people decide to forego retirement savings – or save at minimal levels – to focus on other essential financial goals such as paying off debts and bills or saving to buy a House.
It is only after achieving these goals that they feel ready to invest in pensions. Again, some groups are more likely to do this, usually when they can count on family support (financial or otherwise). And because they are able to think about pensions earlier, they are also more likely to have adequate income in retirement, which projects current inequalities into the future.