Financial advisers often say it’s never too early to start thinking about your pension. And with good reason. As recently as ten years ago, less than half of all UK employees were saving into a workplace scheme, leaving many at risk of poverty in retirement.
Then in 2012, automatic enrolment was introduced. This meant employers were obliged to enrol eligible employees (aged over 22 and earning more than £10,000 a year) into a pension plan, with contributions from both sides.
Since then, pension savings have boomed, with 78% of employees (19.4 million people) actively saving in 2020, up from 47% in 2012.
Working to make a difference in the world but struggling to save for a home. Trying to live sustainably while dealing with mental health issues. For those of us in our twenties and thirties, these are the kinds of problems we deal with every day. This article is part of Quarter Life, a series that explores those issues and comes up with solutions.
But the vast majority of those new savers are still doing so at levels unlikely to provide an adequate income later in life. While income needs vary, evidence suggests that up to 12 million people are currently not saving enough for their retirement.
And because pension entitlements are accumulated through the workplace, they tend to mirror the continuing inequalities of the labour market. Here are four ways in which workplace pensions are not as fair as they could be.
1. Earnings and status
Many people are excluded from workplace pension saving because they do not meet the criteria for automatic enrolment. Recent data found that in 2020, full-time employees earning between £100 to £199 a week had the lowest workplace pension coverage at 41%, compared with 65% of those earning £200 to £299 a week.
Overall, women, ethnic minority groups, people with disabilities, carers and service workers are less likely to have access to workplace pensions due to underemployment and low wages.
Part-time employees were also disadvantaged compared to full-time workers, who were 1.5 times more likely to be part of a pension scheme. People with multiple part-time, low-paid jobs are likely to miss out on access to workplace pensions, even if they earn more than the £10,000 threshold in total.
2. Costly breaks
For most workplace pension savers, retirement income depends on the level of contributions made, as well as the investment returns over the lifetime of the pension. Not making regular contributions forgoes not just the amount in the pot, but the cumulative investment gains.
This means any breaks from work will have a significant affect on pension pot size at retirement. Research has found that not participating in a pension between the ages of 30 and 40 can reduce that pot by up to 32%.
Women are particularly affected. Not only do they take breaks to have children, but also a lack of affordable childcare often reduces their opportunities to return to work, which affects their eligibility for automatic enrolment. In 2019, almost 30% of mothers said they had reduced their working hours because of childcare, compared with just 5% of fathers.
Even where they are eligible for automatic enrolment, many women opt out because of high childcare costs. My research argues for better financial solutions that account for all experiences of employment and caring responsibilities.
3. Regressive tax relief
Workplace pension savers benefit from tax relief on contributions made by themselves and their employer. They also benefit from a tax-free lump sum of up to a quarter of their pension pot. These tax breaks are widely held to be an incentive to encourage people to save.
But these forms of tax relief are regressive, as those with higher salaries benefit to a greater extent. About half of all tax relief on workplace pensions goes to those in the top 10% of earners; a tenth of that relief goes to the bottom 50% of earners.
The tax regime for workplace pensions is effectively subsidising retirement security for those who are already well off. Given that the cost of foregone tax on workplace pensions is estimated to be worth over £20 billion, the money could be better targeted to those who need it.
4. Challenges for young people
As automatic enrolment only applies to people aged 22 and over, many young people are excluded from workplace pension saving. In 2020, only 20% of those aged 16-21 had a workplace pension compared with 80% among those aged 22-29.
Despite the positive effect of automatic enrolment on participation rates among the 22-29 age group, the lack of defined benefit coverage among younger groups means they need to save more or save for longer than older groups to provide for an adequate retirement. Up to 36% of younger groups are thought to be under-saving for their retirement needs.
My research shows that many young people decide to opt out of pension saving – or save at minimum levels – to focus on other essential financial goals such as paying off debts and bills or saving to buy a house.
Only after achieving these goals do they feel ready to invest in pensions. Yet again, certain groups are more likely to get to this point, usually when they are able to rely on family support (financial or otherwise). And because they are able to think about pensions earlier, they are also more likely to achieve an adequate income in retirement – projecting present-day inequalities into the future.