IFS says young workers should be automatically enrolled in company pension schemes | Pensions

According to a leading think tank, employees should be automatically enrolled in a company pension from the age of 16. There are good arguments for having their employers contribute, even if they do not contribute themselves.

The Institute for Fiscal Studies (IFS) has warned that many current workers are heading for “inadequate retirement incomes”, with between 30% and 40% of private sector workers, 5-7 million people, likely to fall short of what is needed for a minimum standard of living.

Employers must now automatically enroll employees who earn enough into a pension scheme if they are between 22 and retirement age, and both contribute unless the employee opts out. The rules state that this must be at least 8% of the employee’s income, with them contributing 5% and the employer adding 3%.

The IFS found that more than one in five people working in the private sector save nothing at all into a company pension scheme. Less than half of those who do save pay more than 8% of their earnings.

According to the report, current savings rates among private sector workers would leave about 32% of respondents with income after work that falls short of their minimum living standards for retirement.

It added that the downside scenario, which is based on a 1 percentage point lower return on pension savings, would mean a 40% increase in the number of people.

The minimum living standard is set by the Pensions and Lifetime Savings Association and currently stands at £14,400 for an individual and £22,000 for a couple. However, the minimum standard will increase with average income.

To boost savings, the IFS said the government should consider raising the age limit for automatic enrolment to between 16 and 75. At the same time, employers should be required to contribute 3% of total earnings to their employees’ pensions, even if they have chosen not to contribute themselves.

It was also recommended that the current standard contribution for some income earners should be increased. For people earning more than £35,000, a standard contribution of 12% should apply, with the employee paying the extra amount.

It said that implementing these changes, as well as several other reforms, would boost pension incomes by 12% to 16% – the equivalent of £1,400 to £2,100 a year – and raise living standards for a large percentage of pensioners. The IFS added that this would also result in a 1% drop in net income.

David Sturrock, senior research economist at IFS and one of the report’s authors, said: “It is really important to seriously consider the affordability of asking for higher pension contributions from many low-income people, and the need for many to save more.

“We propose a way to emphasize encouraging higher contributions during the periods of life when people have average or higher incomes.”

The report is due to be published ahead of next month’s budget. It is rumoured that Chancellor Rachel Reeves wants to make changes to the current pension tax system, making it less favourable for high earners. This could help plug the £22bn funding gap that the Treasury is facing.

To encourage people to contribute to pensions, basic rate tax payers, earners of up to £37,700, will get 20% tax relief on pension contributions, while those earning above that and paying a higher rate of tax will get 40% relief on contributions. It has been reported that Reeves could introduce a flat rate of 30% for all earners.