Opinion: if the Government wants us to save for retirement, it needs to incentivise private pension contributions

With the UK facing a growing pension crisis, the Government must provide a clear strategy to encourage saving – not a mass of contradictions.

No one can deny Brits are fast approaching a crisis point in saving for their twilight years.

In fact, Government figures released this week show those retiring in 2050 will be £800 worse off per year than today’s pensioners.

Equally worrying, think tank the Adam Smith Institute warns the State Pension ‘could go bust by 2036’.

It’s therefore unsurprising that Work and Pensions Secretary Liz Kendall has warned of a looming “tsunami of pensioner poverty”.

A Catch-22 of the Government’s own making?

Faced with this black hole in both public and individual finances, saving into a private pension could be one of the most effective ways to avoid hardship in later life.

But here lies the contradiction in the Government’s stance – while ministers often lecture us on the importance of building a pension fund, its current policies provide little incentive to do so.

5 of the biggest money shocks you’ll face in retirement – and how you can fight back

Inheritance Tax: pensions dragged into the net

The first major blow came in last year’s Autumn Budget when the Government announced that pensions will soon form part of Inheritance Tax (IHT) calculations.

Under current rules, you can pass any unused savings to your beneficiaries without incurring tax when you pass away.

From April 2027, however, any pension wealth left unused when you die will count towards your estate.

Anything above the existing IHT threshold of £325,000 could be liable for a tax bill of up to 40%.

For many people, especially those who’ve saved diligently all their lives, this feels like a betrayal.

And in yet another blow, the Government this week announced that bereaved families, rather than pension firms, will be responsible for calculating the amount of IHT owed.

This move will no doubt create additional stress for families during an already difficult time, as well as fuelling fears of inadvertently making a mistake.

Tax relief next in the firing line?

But the uncertainty doesn’t end there.

For months, there has been ongoing speculation that the Treasury may lead a shake-up of pension tax relief.

At present, you receive tax relief based on the amount of Income Tax you pay.

Basic Rate taxpayers qualify for 20% relief, Higher Rate taxpayers 40%, and those in the Additional band 45%.

However, the Government is reportedly considering introducing a flat rate of 30% on all contributions.

While this would benefit Basic Rate taxpayers, it would hit higher earners hard – slashing the incentive to lock money away.

For many, this feels like moving the goalposts yet again.

Mixed messages risk discouraging savers

This contradiction is stark.

On one hand, the Government tells us to save more for our futures because the State Pension will likely be insufficient.

On the other, it seems to be going after many of the key perks of private pensions.

Why stash money away for decades if you believe your savings will be heavily taxed later on?

And the situation is no better in terms of State Pensions, with constant uncertainty over the retirement age and future of the triple lock on payouts.

Master your pension: complete guide to retirement planning

So, what’s the solution?

A stable, trusted pension system is essential for people to plan effectively for later life.

While there’s no magic bullet to solve the pensions crisis, I would argue there are certain steps politicians could take to incentivise saving.

Reversing the Inheritance Tax change

The Government could either scrap the move entirely or delay it until a proper public consultation can be held.

Bodies such as The Investing and Saving Alliance have already claimed the change risks “unnecessary stress and delays for grieving families”.

Preserving tax relief

Rather than flattening rates, the Government could offer additional top-ups for low- and middle-income earners to encourage contributions, while maintaining higher reliefs for those already saving significant amounts.

Updates to auto-enrolment

Another option could be to increase the amount workers pay into their pension through the auto-enrolment system.

Ministers have already announced a review to explore ways to combat lacklustre retirement savings, with a focus on auto-enrolment reform.

Currently, employees are enrolled in a workplace pension with minimum contributions of 8% on qualifying earnings – including 3% from employers.

The Pensions Commission will now explore the possibility of increasing these contributions.

The final verdict

One thing’s certain: if the Government doesn’t act to restore faith in the pension system, the consequences for personal and public finances could be catastrophic.

Have your say

So, what do you make of the Government’s stance on private pensions so far? Would you agree there has been a confusing mishmash of policies?

Or perhaps you believe the party has little choice given lacklustre growth and escalating public debt.

We’d love to hear your thoughts in the comments below.