State pension age and auto-enrolment: Sarah Coles explains new pension announcements

The state pension could rise

One of the most contentious announcements was a review of the state pension age – which will happen three years early, so has rung alarm bells that the government may want to make changes to the state pension age sooner rather than later. More rises are already on the cards, up to 67 between 2026 and 2028 and then to 68 between 2044 and 2046. However, there’s a decent chance that this timetable will be accelerated.

Clues to potential changes lurk in the most recent review, which suggested a link to life expectancy, and the possibility of setting a rule that people get state pensions for 31% of average life expectancy. It would mean that as people lived longer, the state pension age would automatically rise - so the rise to 68 could happen earlier.

This seems to be backed up by the scope of the current review, which will consider whether we can learn anything from countries that automatically adjust the state pension age to take account of things like life expectancy. There’s also an emphasis on fairness between the generations and making sure the costs are sustainable. Plus, the government has asked for a report on the proportion of adult life people spend in retirement, which certainly sounds like they’re laying the groundwork for this potential change.

During the process, it’s going to be essential to consider regional variations, and also to look at healthy life expectancy – which in Yorkshire and the Humber, ends before the age of 60. If the state pension age was to rise faster than healthy life expectancy, the gap between when our health deteriorates and when we can draw a pension is only going to get harder to manage.

If all this sounds alarming, it’s worth bearing in mind that there are unlikely to be any firm decisions until the new parliament. There also needs to be plenty of warning of any rise, to give people enough time to plan, so there won’t be any overnight changes.

Auto-enrolment faces tinkering

Separately, Rachel Reeves has said that a Pension Commission will look at what people are saving for retirement, and whether it’s enough. The DWP got the ball rolling with a study of the current system. This is known as auto-enrolment and means that as long as you’re employed, and you earn enough, you’re automatically put into the pension at work. Your employer has to put in at least 3% of your qualifying salary, and you need to top it up to a total of 8%.

It’s made a massive difference to how many people are part of a pension at work, but average contribution rates have fallen, so the Commission is likely to look at whether the system needs to force employees and employers to pay more in.

Lots of people aren’t saving enough for retirement

The argument for tinkering with auto-enrolment would be that people aren’t saving enough, so the government has also published a separate report into that. ‘Enough’ is a tricky concept in pensions, so it considered two figures: the basic minimum you need for the bare essentials, and the percentage of your pre-retirement salary you might need to maintain a certain lifestyle. For the average earner, this would be two thirds of your income.

When you look at the percentage who will get the bare minimum, high earners are sitting pretty, and only one in eight people are falling short. However, lower earners are hit hard – because half of them don’t save enough. This might strengthen the argument for higher minimum contributions through auto-enrolment.

When you look at who is on track for an income matching a percentage of their income, you’d be forgiven for coming to the same conclusion. The average earner, working continuously to state pension age, will miss this target, and anyone taking career breaks runs an even bigger risk of falling short. Meanwhile, just half of higher earners will hit the target.

However, on the flip side, seven in eight lower earners are on already track for their percentage of income (because the state pension makes up a decent chunk of what they’re aiming for). If you hiked the minimum they had to put into their pension, they might opt out altogether and end up with a shortfall. So the solution isn’t that straightforward.

Instead, the answer might be to focus on average and higher earners, who need to pay more to hit their percentage targets. Changes could be designed so they are incentivised to pay more in.

There’s a self-employment issue

The research also identified self-employed people as a key group left out by the current system, and are massively undersaving for retirement. As part of the consultation, it’s vital that the Lifetime ISA is considered as part of the solution. This can appeal more to those with ‘lumpy’ incomes, who are worried about locking money away, because unlike in a pension, they can withdraw money in an emergency. The 25% government bonus acts in the same way as basic rate tax relief and any income can be taken tax free.

A few tweaks could make them even more effective for this group. If you withdraw money early, you’ll pay a 25% penalty. This not only removes the effect of the government bonus but also a chunk of people’s savings. Reducing the charge to 20% would mitigate this and encourage more people to use the LISA. Allowing people to open one beyond the age of 40 would also help those who become self-employed later in life.

It's going to take some time to work through all of this, so there will be no escaping all the pensions chat for a while. Even when the Commission reports and the review is published, nothing is going to happen in a hurry, because the government has learned from the mistakes of previous governments, and knows the trouble it can get into if it doesn’t give people time to plan. It means we’ll get a fair bit of debate over a reasonably long period. Those pensions nerds are going to think all their Christmases have come at once.

Premium Bonds

This week NS&I has announced it has helped reunite people with £120 million in Premium Bonds and prizes. However, more than 2.5 million prizes worth over £103 million remain unclaimed, so it’s worth considering whether any of this belongs to you.

There’s no time limit on claiming prizes and bonds, so don’t panic, there’s still time to track them down. It’s easiest if you have your bond numbers, because you can just check them on the NS&I website. Otherwise, you can use NS&I’s tracing service. There’s a form on the website you can print off and post to them. If you’re concerned you may have lost accounts from a number of institutions, you can also use the My Lost Account service. It’ll take up to 90 days for them to get back to you and let you know if you have an account with them. Then you need to contact them direct.

Sarah coles Head of Personal Finance and Podcast Host for Switch Your Money On Headline Money Press Team of the Year Hargreaves Lansdown