Pensions are a fundamental part of the retirement planning process for millions of people and a critical component of the social safety net. However, there is ongoing debate about whether the UK's current pension system is holding back UK Plc.
The case against pensions
As well as the cost of contributing to pensions for business, the cost of State pensions is rising due to the ageing population, placing a significant burden on the public purse. Money spent on pensions is of course unavailable to be spent elsewhere.
More recently, it appears that the shortage or workers, in part brought on by Brexit and Covid, has been exacerbated by those who have discovered the joys of pensions freedom and an early retirement while working from home during lockdowns (or indeed not working at all during furlough). Joining the ranks of the retiring baby-boomers, current financial issues do not appear to have been an issue, although whether this remains the case for those who have stopped working in their 50s and do not have the benefit of an inflation protected gold-plated final salary pension remains to be seen. Indeed, we have already witnessed a number of individuals taking the step back into work, as the value of their pension pots diminishes and the purchasing power of each £1 spent reduces under the weight of record inflation.
Perversely the Lifetime Allowance on tax relievable saving appears to be playing a part in this, encouraging early retirement for those fortunate enough to have a pension pot of sufficient size. This is not as unobtainable as it may sound, and now includes a number of public sector workers. Faced with the punitive tax consequences of further pension saving, it is easy to see why they may have decided to retire.
The case for pensions
Set against the above, providing workers with pensions gives them greater security in later life and allows them to plan for their future and increases their confidence to spend money, which can stimulate economic growth.
Additionally, well-funded pension plans can provide a reliable source of long-term capital for investments in infrastructure, research and development, and other areas that can drive economic growth. With c£3tn of assets involved and growing, Government attention is naturally drawn to this pool of money, looking to steer its use for the benefit of UK Plc, attempting to unleash economic growth and increased productivity, which have both remained stubbornly low.
In conclusion
So, are pensions holding back the UK? Yes, in part. And the House of Lords is looking at some of the unintended consequences of pensions legislation and tax requirements, so that pensions can in future be a larger part of the solution.