Pension warning: UK has lowest pension contributions in the OECD – what country is top?

Budget 2021: Sunak announces pension lifetime allowance freeze

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Pension holders in the UK are struggling in comparison to other OECD countries, with nearly 40 other nations providing better retirement outcomes for their citizens. According to analysis from TISA, the UK’s mandatory pension provision is nearly half the OECD’s average.

The UK’s Net Replacement Rate (the representative pension income to pre-retirement earnings) is just 28.4 percent compared to the OECD average of 58.6 percent.

For comparison, Turkey has the best mandatory provision at 93.8 percent.

TISA noted that when voluntary schemes are included in the research, the UK fares better but is still “well below” the OECD average.

The UK’s NPR rises to 61 percent compared to an average of 65.4 percent across the OECD when auto enrolment minimum contributions are considered.

This has proven to be a long term issue for the UK, with it being shown that the UK’s Net Replacement Rate has dropped by nine percent since 2011.

As a result of these findings, TISA have called for the auto enrolment contributions rate to increase to 12 percent of full salary, to ensure savers in the UK have a more adequate pension provision for later in life.

If this increase, which TISA argued is generally agreed industry-wide as an appropriate level, was introduced the NPR rate in the UK would rise to 77 percent.

TISA explained this would give “individuals a lifestyle in retirement far more akin to when they were in work.”

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Should a contribution rate of 12 percent of total salary be introduced, it would rank the UK 12th out of 36 OECD countries, based on 2019 figures.

TISA acknowledged this could place financial strains on employees and employers alike and as such, they proposed incremental changes through a contribution escalation schedule spanning six years.

This would allow a period of several years for all parties impacted to prepare for the changes and for them to be implemented in a gradual way.

Renny Biggins, the Head of Retirement at TISA commented on the research: “If the UK is to continue in its progression to offer a truly world-class pension system then, other than making further enhancements to the state pension which we believe would not be palatable to Government or the public, we need to increase AE contribution levels to enable us to compare more favourably with our international peers.

“We believe an increase in minimum contribution rates to 12 percent of salary would just about achieve a balance between an inertia approach and the opportunity to achieve enhanced outcomes through engagement.

“It is a collective Government and industry responsibility to ensure AE remains a success, relevant to a constantly changing backdrop of personal wealth, taxes and working patterns, and continues (in combination with state pension) to produce good consumer outcomes which are comparable with our international peers.

“We also recognise that it can realistically take several years for agreed proposals to make their way into legislation, which is why we call for a second official DWP AE review to take place no later than 2022 and for future statutory reviews to take place periodically.”

As it stands, automatic enrolment rules mean all employers must provide a workplace pension scheme in which eligible workers are enrolled.

Contributions will then be made into these schemes so long as the member is classed as an official worker, is aged between 22 and state pension age, earns at least £10,000 per year and “ordinarily” works in the UK.

Under the current rules, an employer does not have to automatically enrol an employee if they do not meet the normal criteria or if any of the following apply:

  • They’ve already given notice to the employer that they’re leaving a job, or they’ve given them notice
  • They have evidence of their lifetime allowance protection (for example, a certificate from HMRC)
  • They’ve already taken a pension that meets the automatic enrolment rules and their employer arranged it
  • They get a one-off payment from a workplace pension scheme that’s closed (a “winding up lump sum”), and then leave and rejoin the same job within 12 months of getting the payment
  • More than 12 months before their staging date, they left (“opted out”) of a pension arranged through the employer
  • They’re from an EU member state and are in a EU cross-border pension scheme
  • They’re in a limited liability partnership
  • ⦁ They’re a director without an employment contract and employ at least one other person in their company

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