The Institute for Fiscal Studies has launched a major multi-year review of the pension tax system, in partnership with the Abrdn Financial Fairness Trust.
The review will examine the effects of the changing economic and policy environment, with the landscape looking vastly different to when the Pensions Commission was published in 2006. Since that date, the UK has experienced a financial crisis, a global pandemic and more recently, the highest levels of inflation in almost 40 years. These changes are threatening the living standards of those seeking a comfortable retirement, the think-tank said.
Commenting, Tom Selby, head of retirement policy at AJ Bell, said: “Pensions, and particularly the tax system linked to pensions, have been subjected to incremental and often incoherent reform since Lord Adair Turner’s Pensions Commission delivered its final report in 2006. Given that the Commission’s findings were published 17 years ago, we are long overdue a deep assessment of how the UK retirement system is working and any reforms that could help improve financial resilience.
“The original Turner Commission report was the catalyst for automatic enrolment, a reform built around cross-party consensus that has helped introduce millions of people to retirement saving for the first time. While auto-enrolment is not perfect – in particular the issue of pensions adequacy and how to scale up contributions needs to be addressed – it has stood the test of time in large part because politicians broadly agreed it was necessary to begin addressing chronically low retirement savings levels in the UK.
“We now need a similarly consensual approach to be taken on the issue of pensions taxation and wider retirement savings policy.”
Selby said complexity and constantly moving goalposts has undermined confidence in pensions and risks putting people off engaging further.
Selby continued: “This IFS review could potentially form the basis for a more sensible, long-term approach to pensions taxation, with the aim of making the rules easier to understand and encouraging more people to save for their financial future.”
The review, which will be led by three directors at the IFS, will be guided by a steering group consisting of former Chancellor of the Exchequer Alistair Darling, former Secretary of State for Work and Pensions David Gauke and former CEO of the Pensions and Lifetime Savings Association Joanna Segars.
The review will centre on three key questions. The first will explore whether people are saving appropriately for retirement, in terms of both the amount and the form of saving, and how government policies can help.
Selby said: “Auto-enrolment has been successful in dramatically increasing the number of people saving something for retirement, but now is not the time for the government to sit back and admire its achievement. Given the UK has created a long-term savings framework around defined contribution pensions, it makes sense to build on these reforms rather than confusing the landscape further. The possible exception to this could be creating a rainy-day saving mechanism into auto-enrolment, to help boost short-term financial resilience.”
According to Selby, the minimum 8% auto-enrolment contribution level is too low and introducing a form of auto-escalation, where contributions rise in accordance with someone’s salary, could be one way of helping people save for retirement.
Selby added: “In addition, retirement saving solutions need to be found for those who are not covered by auto-enrolment, in particular millions of self-employed workers. There are ideas of how to do this, including potentially using the tax system to effectively auto-enrol the self-employed – although this approach would likely involve significant costs to the government.”
The Pensions Review will also explore how the state should support people from late working life into and through retirement and whether people require more assistance to use their wealth appropriately through retirement.
The IFS said it will undertake empirical analysis to understand recent economic trends and how people have responded to previous pension reforms. In addition, it will take into consideration the views of policymakers, those in the pensions industry and those representing different groups of individuals.
Selby added: “The focus of policy needs to be on education and empowerment of savers to make retirement decisions that are appropriate to their needs and circumstances. All-too-often there is a clamour for new products to ‘solve’ retirement for people. But the pension freedoms introduced in 2015 mean that savers have the tools to build a retirement plan that suits their needs today. Indeed, lots of people already take advantage of the flexibility of drawdown with the security provided by an annuity income.
“While those who take regulated financial advice are well catered for in retirement, millions of people in the UK who don’t take advice also need help making good decisions about their finances.
“The ultimate aim needs to be ensuring everyone, regardless of their means, has access to sufficient help, information and ideally advice to make sensible choices both when saving for retirement and turning their pension into a retirement income.”
Sangita Chawla, managing director of Standard Life, welcomed the review, noting that the current pension system is under growing strain as long-term pressures start to build.
“As things currently stand many younger and midlife workers are at risk of missing even the PLSA’s minimum standard of living in retirement with the self employed and those who are likely to be renting in retirement especially vulnerable.
“With the onus increasingly on individuals to make complex financial decisions, particularly at the point of retirement, advice and guidance aren’t as accessible as they need to be and greater support is required to avoid people making costly mistakes.
“There are also difficult discussions to be had regarding the scope of the state pension, which is the bedrock of most people’s retirement, at a time when the public purse is under huge scrutiny. We will follow this multi-year piece of work with interest,” she said.
