'The chancellor must tackle the tangled pensions undergrowth'

Yet its potential disastrous fallout could rock the very foundations of UK retirement provision within two decades.

In my view, this is the most pressing problem of all from my top 10 pension priorities (listed below) for the chancellor’s imminent Budget.

Forty years ago, interest rates were at a stellar high. Getting on the housing ladder was difficult and mortgages rationed. Today it is far worse: housing costs have  gone up by a staggering 974 per cent since 1983, according to the Halifax.

1. The lifetime renter 

Single people today are largely excluded from home ownership in London. A joint income in excess of £100,000 will buy you a rabbit hutch in London’s Zone 2. Many will never afford their own home. Rent in London starts at £1,000 a month for a small flat.

If you are not on the housing ladder by 50, the chances are, you never will be.

My fear is that the UK’s successful pensions auto-enrolment policy could collapse like a house of cards if most workers become lifetime renters. In stark terms, the average saver on the auto-enrolment minimum plus the state pension will have enough for a frugal lifestyle but will not be able to afford to rent a home. 

In 2017, almost three-quarters of people aged 65 years and over in England owned their home outright, with just 6 per cent renting from a private landlord. Now, one third of people in their 30s and mid 40s are renters. If you are not on the housing ladder by 50, the chances are, you never will be.

People currently in their 40s – the first generation with no defined benefit pension or other provision – will retire in 20 years’ time. If renting is then the norm, their rent will be too great a burden either for the state or the individual to finance unless action is taken now.

Department for Work and Pensions statistics show that at November 2022, almost 6mn people receive state help towards housing, either through housing benefit or universal credit, with housing benefit alone costing £23.4bn an year. 

Indeed, a recent New Statesman article highlighted that that is “more than the total running costs of government departments including the Home Office, the Ministry of Justice and the Department for Transport. Only health and social care, education and defence account for larger shares of day-to-day spending”.

Advisers and mortgage brokers do an incredible job to make home ownership possible, but they alone cannot do all the heavy lifting. We need more social housing or possibly the return of mortgage income tax relief at source on loans to new home owners, as was the case in the 1970s. If that is in the ‘too difficult file’ for now, at least make a start on my next nine major pension problems.

These are:

2. Cost of living crisis 

If inflation is not quelled, many more may opt out of pensions savings. The rot has already begun. The Chancellor should encourage employers to pay the employer’s share of auto-enrolment for a strictly limited period for all their workers who opt out. 

3. Time for a rise?

The chancellor should set firm dates for phasing in auto-enrolment contribution hikes. The current total of 8 per cent is far too low.

Make a start by levelling up employer contributions from 3 per cent until they match employee contributions at 5 per cent.

Undoubtedly, this adds millions to the nation's wages bill, but should employers be allowed to remain in business if they do not provide adequate pensions for their staff? There has been 10 years of procrastination – at least, set a date for the next step today.

4. The dead hand of pensions tax

Pensions tax works for almost no one, from the lifetime allowance, down to just £1.07mn from £1.5mn (2006-07), to annual allowance, down to £40,000 from a generous £255,000 in 2012.

And the measly money purchase annual allowance of £4,000 prevents those aged over 50 who have dipped into their pension pots during the pandemic from rebuilding them, now they are back in work. 

5. Less bang for your buck

Investment returns are expected to be lower in the future, so today’s savers not only have to save more to get the same end result as their parents, but also inflation has made a savage fiscal haircut – so, raise tax limits. 

6. Default fund lottery 

Nine in 10 workers in UK pensions are enrolled in auto-enrolment default pensions (where they do not have to make a choice of fund).

They face a huge dispersal of investment results and outcome – yet the regulators spend more time focusing on charges and governance than outcomes.

For the saver, it is entirely the luck of the draw which pension scheme the employer chooses. There is not much the typical employee can do about it.

The regulators should shut down the poor-performing default funds and encourage more employers to switch master trusts.

Here advisers could play a big role. All too many employers just think ‘job done’, set and forget, to the detriment of their employees.

7. Public sector pension burden

The public sector pay bill amounted to £233bn in 2021−22, more than one-fifth of total government spending – 33 per cent of what government spends on public services and almost 10 per cent of national income.

As much as 18 per cent of the pay budget goes on employer pension contributions. Most private employees get just 6 per cent according to the Institute of Fiscal studies.

Not only is the public sector pensions bill ballooning out of control but it is unfair that poorer taxpayers often pay heavy taxes towards financing some public sector employees’ retirement. Time to level up? 

8. Danger of too many eggs in one basket 

Hundreds of old companies' DB pensions are offloaded to just four or five insurers. The collapse of any one could be 10 times worse than the Maxwell or Equitable Life disaster.

Is the Financial Services Compensation Scheme up to the job of bailing out a major UK insurer, should the worst happen?

9. Finding a good independent financial adviser is a matter of chance

Comparing one IFA with another is difficult. Essentially, the only tools usually available are directories and word of mouth.

The FCA should shine a light on retail discretionary management performance – it is shrouded in mystery for too many consumers at present. 

And why the huge disparity between retail and wholesale charging?

10. Do not let the government kill off pensioners through neglect

The UK has too few workers to finance huge pensioner needs, from the state pension to social care.

Three in 10 old people live on their own, often with poor health, needing carers. 

Effective solutions to the social care crisis have been kicked into the long grass. Get a move on. Perhaps  the government is trying to kill us all off, through lack of provision, before our time, to save money?

That is quite a ‘to do’ list for one Budget. Yet with a will to act, there is a way through this dense thicket of troubles.

It is up to the chancellor to lead the UK through the tangled pensions undergrowth in his Budget on 15 March.

Stephanie Hawthorne is a freelance journalist