Rachel Reeves is trying to fix a today problem by creating a tomorrow problem – but there is a better way

21 January 2025, 19:02

There are few things the average Brit wants to talk about less than pension savings. I get it, believe me.

Not only do most of us tend to recoil from conversations about money at all, but saving for retirement can feel a very long way off when we’re young. Similarly, as everyday expenses and one-off costs come up and we grapple with a cost-of-living crisis, long-term savings will understandably get bumped down the priority list.

There’s only so long we can do this, however, before we’ll be forced to live with the consequences. And they may not be pretty. Figures out today show that the percentage of those on track for a moderate retirement has fallen in the past six months, due to inflation outstripping pension savings.

The Hargreaves Lansdown figures show that the average household’s savings are £31,546 short of the amount needed to give people a moderate standard of living in retirement.

Even more concerningly, the Institute for Fiscal Studies has been sounding the alarm for some time now that many of us will retire with inadequate savings to support even a modest standard of living.

Change is coming – but not for the best

It's against this backdrop that many of us are bracing for the upcoming changes to National Insurance (NI) which are set to have a big impact on employers across the UK. Chancellor Rachel Reeves announced during the 2024 Autumn Budget that employer NI contributions will rise, while the earnings threshold at which employers start paying NI will drop, starting from the 2025/26 tax year.

I totally sympathise with the Chancellor’s need to raise money. We know she is facing a “black hole” in public finances and these changes are expected to raise £25 billion annually. But the significantly higher payroll costs that will now become reality for many businesses are likely to have some serious consequences for many businesses – including small businesses and not for profit organisations.

The increase in employer NI contributions means it will cost businesses more to employ people. To manage these additional expenses, employers might consider reducing other benefits, such as pension contributions, to maintain their financial stability. This could lead to lower pension contributions for employees, directly impacting their retirement savings.

If we look at the bigger picture, Gen Z, Millennials and even Gen X (the oldest of whom are in their late 50s by the way) have saved far too little to support themselves after work. It can’t be right that we are making it even harder to get money into their pensions while we still have time to do so.

Is there a better way?

The government has a chance to create a real and meaningful economic legacy right now that improves the lives of its citizens for generations to come. In my view, this will involve showing businesses why it is in their best interest to pay more into their employee’s pension pots, rather than economically punishing them for doing so.

We need to get buy-in from businesses for increasing auto-enrolment contributions from 8% to 12%. This is the single most effective change the government could make to avoid a real pensions crisis. Doubling pension contributions is really the only feasible way to increase the dire national savings rates in the UK.

With that said, it’s important to acknowledge that increasing auto-enrolment contributions may not be a one-size-fits-all solution. For lower earners, higher contributions could reduce their take-home pay, exacerbating financial challenges. Therefore, any policy changes should be carefully designed to balance immediate financial needs with long-term retirement goals, perhaps by implementing gradual increases or providing additional support for those who might be adversely affected.

Finally, we need to be thinking about creating tax incentives for the self-employed so they pay more into their pensions. Left out of the UK’s 2012 pension reforms, around some 3.5 million self-employed people of working age save absolutely nothing into a private pension. Consequently, their retirement prospects will be pretty dismal. This needs to change.

The UK is sleepwalking into a savings crisis, and, sadly, not many seem to have noticed. The government must look at how we can encourage far more investment into pensions across the country. Let’s look at doing all we can to get individuals and businesses investing for their future and help people make sense of the confusing and incredibly clunky world of pensions, so they are empowered to make better financial decisions.

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Chris Eastwood is founder and CEO of Penfold Pensions.

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