Sam Christian has about £55,000 in her pension but fears she will need a lot more before she will be able to retire comfortably. “Whenever I put the numbers into a calculator I feel worried,” said Christian, 38, from Kent. “It makes me think I should be putting more in.”
She took a year off work when her daughter Rose, 5, was born and her employer did not make any contributions to her pension for the final 13 weeks of her maternity leave. “I don’t like to think about how that is going to compound over my lifetime,” said Christian. “If employers kept pension contributions going during maternity leave it would make a big difference.”
The Pensions and Lifetime Savings Association (PLSA) says that you now need an income of £31,300 a year for a “moderate” retirement, and that assumes no housing costs. But its analysis suggests that four out of five people are not saving enough for this.
Today The Sunday Times launches its Plug the Pension Gap campaign, calling for the government to help workers to save for the future and avoid a looming pension crisis. Politicians, industry bodies and campaign groups have backed the proposals, which they say will close the pension gap.
Our five-point pension plan
• Give savers the chance to top up ten years’ worth of national insurance contributions to boost state pensions
• Increase employer pension contributions to a minimum of 5 per cent through auto-enrolment
• Ensure employers continue pension contributions for staff on statutory maternity or parental pay so that parents do not miss out
• Increase in line with inflation the amount that can be paid into a pension of someone not working
• There should be a dedicated pension commission so that all parties agree big pension changes
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Steve Webb, a former pensions minister and a partner at the consultancy LCP, said: “This campaign has some very practical proposals that would boost overall pension saving and help to tackle the gender pension gap.”
John Palmer from the charity Independent Age said: “Pensioner poverty has been increasing since 2012 and is at its highest level since 2008. We must ensure that no one reaches later life without enough money to live well.”
Caroline Abrahams, the charity director of Age UK, said: “Making sure that people are saving enough for their retirement is absolutely vital to helping achieve a decent standard of living once they retire. We’re pleased to support the Sunday Times’ campaign.”
• We must do something now to avoid a pension crisis
Nigel Peaple from the PLSA said: “We welcome this campaign. It is widely recognised that not enough people are saving enough for an adequate pension.”
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Wendy Chamberlain, the Liberal Democrat spokesperson for work and pensions, said: “We must take immediate short-term steps to help pensioners now, but also long-term reforms to ensure the retirements of future generations. These steps would have a significant impact on the retirement savings of those in low-paid and part-time work, especially women and carers.”
Rebecca O’Connor, the director of public affairs at the pension company PensionBee, said: “This campaign focuses on achieving improvements that could make both the state and private pension systems work more equitably and effectively.”
Phil Brown from the pension provider People’s Partnership said: “We know that four in ten people are not saving enough for their retirement and it is important that there is a cross party consensus on how to tackle the problem of under-saving. This welcome campaign includes calls to action which would go some way to addressing this very real problem.”
Here are the campaign demands.
1. Help savers to boost their state pension
The new state pension pays up to £203.85 a week (£10,600 a year). To get the full amount you must have made 35 full years of national insurance contributions, and you need ten years of contributions to get any state pension at all.
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Topping up your national insurance record can help to boost your retirement income and we believe it should be made easier.
It typically costs £17.45 to fill in a missing week of contributions, or £907.20 to make up a year’s worth. Filling in one year of contributions will give you about £300 extra a year of state pension — over a 20-year retirement that is about £6,000 (and it is likely to be more, because that’s not taking into account increases to the state pension).
Normally you can make up six years of missed contributions, but there is a way you can top up an extra ten years until April 5, 2025. We believe that you should always be able to make up ten years of contributions. This would help to ensure a better standard of living in retirement for millions of people.
More than £390 million of voluntary national insurance contributions were made in the year to March 31, 2023, up from £212 million the year before.
O’Connor said: “These changes would benefit people who are trying to do the right thing for their future but may be thwarted by unnecessarily restrictive rules.”
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• Should the state pension age be raised above 70?
2. Make employers pay more
Under auto-enrolment more people are saving for their retirement than ever before — but most are not saving enough, and we think employers should do more to help. You are automatically signed up to your workplace pension scheme if you earn more than £10,000 and are aged 22 or over but under state pension age. The minimum contributions are 5 per cent out of your salary and 3 per cent on top from your employer.
At this rate, if you started saving at 22 on a salary of £27,000 you would have a pension pot worth £424,735 by 68, the expected state pension age by 2046, assuming that your salary increased 2 per centeach year and 4 per centinvestment growth after fees.
The wealth manager Quilter said a single person would need a pension pot of about £460,000 on top of getting the full state pension to have enough for the PSLA’s “moderate” retirement. This would give you enough money for one two-week foreign holiday a year and about £55 a week for groceries.
We believe companies should provide more help. If employer and employee each contributed 5 per cent, the same 22 year old would have a pot worth £530,919 by age 68 — an extra £106,000, according to number-crunching by the wealth manager AJ Bell. Equal contributions are already mandatory in other countries such as Australia.
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Someone who started saving at age 30 while earning £32,000 would have £326,360 by age 68 based on the current minimum contribution levels. They would have £407,950 if their employer contributed 5 per cent instead. For a 40-year-old the figures would be £189,927 and £237,408.
Stephen Timms, a Labour MP and the chair of the work and pensions committee, said: “I strongly support this call. The current minimum contribution is just not enough to deliver the standard of living in retirement that most people want. This would be a welcome first step, though it will have to be consulted on and phased in carefully to avoid causing problems for employers.”
Webb said: “It seems only right and fair that workers and firms should contribute equally. This one measure would generate billions of pounds of extra pension saving at a stroke.”
3. Do more to help mothers
The gender pension gap is becoming a chasm. Women have average pension savings of £69,000 by the age of 67 (the state pension age from 2026), compared with £205,000 for men, according to research by the pension company Now: Pensions and the independent researcher the Pensions Policy Institute.
Pay disparity is a key reason for this, but other factors are also at play, including reduced pension contributions during maternity leave.
Women who take statutory maternity leave of 39 weeks could receive no pension contributions for 13 of those weeks (a company must pay 90 per cent of your salary for at least the first six weeks of maternity leave and make pension contributions in the first 26 weeks of your leave). This creates a savings gap.
We believe companies should have to continue contributing to your pension throughout statutory maternity leave at the same level they were before, regardless of whether or not the employee is reducing or temporarily stopping their contributions. This is no additional cost burden to an employer, who would be paying these contributions if the employee had not gone on maternity leave. Men taking shared parental leave should get the same.
Joeli Brearley from the women’s campaign group Pregnant Then Screwed, said: “The gender pension gap is catastrophic for women’s quality of life. One way of partially addressing this inequity is to maintain pension contributions from employers during maternity leave and to increase the third party contribution limit. That is why we keenly support this campaign.’’
Tom Selby, the director of public policy at the investment platform AJ Bell, said: “Improving maternity rights in relation to workplace pensions would also be a positive step to tackle the gender retirement gap that exists in the UK.”
4. Allow partners to pay more
Anyone who is not working can pay £2,880 a year into a pension and qualify for tax relief at the basic rate of 20 per cent, boosting it to £3,600.
This allowance has not changed since 2001. If it had increased in line with inflation it would now be £6,448 after tax relief. While many families would not be able to afford to use this full allowance, it should keep pace with the cost of living.
Women take ten years out of work on average to raise children or take on other caring responsibilities. This amounts to an average of £39,000 in lost pension savings, according to NOW: Pensions and the PPI. If their partner could make greater contributions for them, this would narrow the pension divide.
Tom Selby from the investment platform AJ Bell said: “Various allowances have failed to keep up with inflation for far too long. This is a classic example and is long overdue an upgrade.”
• Stop playing politics with our pensions
5. Set up a pension commission
Constant tinkering is causing confusion and distrust. In his budget last year, the chancellor, Jeremy Hunt, scrapped the pension lifetime allowance — the £1,073,100 limit of how much you can have in your pot before you are hit with a hefty tax charge. Labour has said that it will reinstate the allowance if it wins the next election. Such short-term changes are leaving savers in limbo, unable to plan for the future.
An independent pension commission could ensure that key decisions are properly tested and receive cross-party approval so that savers trust that the decision will not be changed or reversed months later.
• What the election could mean for your pension
Selby said: “A commission could bring some much-needed stability and help to build a consensus around the best way forward for the pension system, with a focus on making the rules simpler and encouraging more people to save for retirement.”
This is not unprecedented. A pension commission led by Lord Turner and reporting to the Department for Work and Pensions between 2002 and 2006 was crucial in the implementation of auto-enrolment. An independent public service pension commission chaired by John Hutton in 2011 was tasked with reviewing the structure of public service pension provision.
O’Connor said: “This would stop pensions being used as a political football, as we have seen with changes such as the abolition of the lifetime allowance, which can cause hours of unnecessary stress for savers and those working to help them.”
The DWP said: “We plan to expand automatic enrolment to further benefit women and low earners and we recently published the first official measure of the Gender Pensions Gap, which will help track the efforts to close it.
Tell us what you think should be done to plug the pension gap in the comments below
