Call for workers to increase pension pot contributions

Updated: 

People need to be putting 15% of their lifetime earnings into their pension pot, a review for the Labour Party has recommended.

The report, which follows a two-year study, said a national savings target of 15% of lifetime earnings should be adopted "to avoid future pensioner poverty".

The findings were published by the Independent Review of Retirement Income (IRRI), which was set up in 2014 by Labour to review the pensions market. It is chaired by Professor David Blake, director of the Pensions Institute at Cass Business School.

Under automatic enrolment into workplace pension schemes, the minimum contribution as a percentage of earnings is currently set at 2%, including contributions from workers, employers and tax relief. The minimum contributions level will increase to 8% in the coming years.   

Minimum contributions are being escalated over time, to help people get into the habit of paying into a pension initially. So far, around nine in 10 people are staying in the workplace pension they have been placed into under auto enrolment, which started in 2012.

The report also recommended the Government should set up an independent pensions, care and savings commission, reporting to Parliament, to ensure there is cross-party consensus for future pension reforms.

In another key recommendation, the report said a "safe harbour retirement income plan" should be introduced, to help people take out the most dependable retirement income products for their personal needs.

"Middle Britain" - those with pension assets between £30,000 and £100,000 - should be recommended to use a retirement income plan that involves a simple and limited set of pathways, the report said.

It continued: "There are now far too many poorly designed and expensive choices of product available at retirement."

New retirement freedoms were introduced in 2015, which mean that people aged 55 and over no longer have to buy an income called an annuity when they retire. Instead, they can use the money how they wish, subject to tax.

But the report warned that people could struggle to make their money last - and their cash could also become a "honey pot" for fraudsters.

It said: "For anyone who understands the risks involved in retirement income provision, it is clear that many of these people will find themselves in the same kind of control as a yachtsman in the middle of the Atlantic in a force nine gale."

The findings come after the announcement by the Government of a review into the state pension age sparked warnings among pension experts that the younger generation joining the workforce now could be aged in their mid-70s before they start to draw any retirement income from the state.

And a report from Royal London found that workers in some parts of the UK may need to work into their 80s in order to achieve the lifestyle they are used to in retirement - underlining the prospect of some people having to "work until they drop".

Former pensions minister Steve Webb, who is now director of policy at Royal London, said: "It is great news that millions more workers are being enrolled into workplace pensions, but the amounts going in are simply not enough to give people the kind of retirement they would want for themselves, and certainly not the sort of pensions that many of those retiring now are enjoying."  

Owen Smith, shadow work and pensions secretary, said: "Professor Blake is right to challenge Government and employers to play their part in mitigating the danger that pensioners who have saved all their lives might still have insufficient funds to last them through retirement.

"These problems are only growing for younger generations who are finding it increasingly difficult to put aside the 15% of lifetime earnings that Blake reminds us is needed for an adequate pension."