Pension reforms under review: what it means for your retirement savings?

The government has relaunched the Pension Commission and announced an early review of the state pension age as part of a major pensions overhaul.

New Department for Work and Pensions (DWP) reports show retirees in 2050 are likely to be financially worse off than pensioners today, prompting calls for wide-ranging reforms.

Here, Which? breaks down the key government proposals, what could change, and what it means for your retirement income.

Why future retirees could get less

Many people retiring in 2050 could have £800 a year less private pension income than today’s pensioners, according to government figures.

Almost half of working-age adults aren’t saving anything for retirement, meaning millions risk relying solely on the state pension.

The groups most at risk of a pension shortfall include lower earners, self-employed workers and some ethnic minority communities. 

More than three million self-employed people aren’t saving into a pension, and just one in four low earners or people from Pakistani or Bangladeshi backgrounds are putting money aside.

There’s also a stark gender gap in pension wealth. Women approaching retirement typically have £5,000 a year less private pension income than men.

• Find out more: how much you need to retire

The key pension changes under review

The Pension Commission has been relaunched to review the UK’s pension system and recommend ways to improve retirement incomes.

An initial report is due in 2027, with any changes likely to come in after the next election. Here are the main areas under review:

Expanding auto-enrolment 

Auto-enrolment, introduced in 2012, means most employees are automatically signed up to a workplace pension, with a portion of their wages paid into a fund.

However, some workers are excluded. Those under 22 and people earning less than £10,000 a year aren't automatically enrolled, though they an opt in. 

At least 8% of salary must be paid into workplace pensions, with employees contributing 5% and employers 3%. 

The Commission will consider widening access and whether overall contributions should increase to 12% in future, though no changes are expected during this Parliament. 

• Find out more: pension auto-enrolment: how it works

State pension age review

The next state pension age review will take place earlier than planned, in 2027, following the last review in 2023. 

Under current plans, the age rises to 67 between 2026 and 2028, and to 68 between 2044 and 2046. Any changes must be announced at least 10 years in advance.

The review will assess whether these increases need to happen sooner, considering life expectancy, regional differences and public finances.

While the triple lock isn’t under review, its rising cost will influence decisions. It’s forecast to cost £15.5bn a year by 2030 – three times higher than first expected. 

Analysis by the Institute for Fiscal Studies suggests the state pension age may need to rise to 74 by the late 2060s to keep the triple lock affordable. 

If the pension age rises, people may have to work longer or rely more on private savings before qualifying for the state pension.

• Find out more: state pension age calculator 

Self-employment shake-up 

Unlike traditional employees, sole traders, freelancers, and other self-employed individuals are not covered by auto-enrolment schemes. This means they do not receive employer contributions to their pensions, placing the full responsibility for retirement savings on their shoulders.

Self-employed workers' pensions were identified as a key area of focus, signalling potential reform. Often, volatile earnings make people hesitant to lock away money.

Helen Morrissey, head of retirement analysis at investment provider Hargreaves Lansdown, says lifetime Isas (Lisas) should be promoted as a pension option, or automatically opened for self-employed individuals.

Lisas allow you to save up to £4,000 a year with a 25% government bonus, but there are restrictions. 

Withdrawals before age 60 (unless buying a first home) come with a 25% penalty, which takes back the bonus and reduces your own savings. You also can’t open a Lisa after the age of 40, excluding those who become self-employed later in life.

• Find out more: lifetime Isas vs pensions

Tackling the gender pension gap

Women still retire with far less private pension income than men. 

The latest DWP figures show the gap is 22% for people in their late twenties but rises sharply to 52% by the late forties.

Lower earnings, career breaks and part-time work all play a role. This is another focus area specifically highlighted by the DWP.

Experts say a 'key step' would be reforming auto-enrollment rules, in particular removing the £10,000 threshold. 

However, Sarah Pennells, consumer finance specialist at pension provider Royal London, said 'structural barriers' that prevent women from building pensions need to be addressed. This includes childcare costs and caring responsibilities. 

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How to boost your pension savings now

Any changes from the Pension Commission will take years to come in. But there are steps you can take right now to improve your pension savings.

Consider deferring your state pension 

If you don’t need your state pension immediately, deferring it can boost your retirement income.

 For anyone reaching state pension age since April 2016, payments rise by nearly 5.8% for every year you defer, or around 1% for every nine weeks.

This can be worth considering if you’re still working or have other income.

• Find out more: should I defer my state pension?

Top up missing National Insurance years 

Gaps in your National Insurance record could reduce your state pension. You can buy voluntary contributions (known as Class 3 contributions) to fill gaps from the past six years.

You usually need 35 qualifying years for the full state pension and at least 10 years to get anything. Voluntary contributions don’t always boost your entitlement, so it’s worth checking first using the government’s online tool.

• Find out more: should I top up my state pension?

Check for better workplace contributions 

Employer contributions are often described as ‘free money’. By law, employers must pay at least 3% of your salary, but some pay more, especially if you increase your own contributions.

A higher salary can also mean a bigger pension contribution. While not everyone can change jobs, it’s worth checking the pension perks if you’re job hunting.

Use salary sacrifice to save more efficiently 

Salary sacrifice can help you save more by swapping part of your salary for extra pension contributions. This reduces your taxable pay, so you pay less tax and National Insurance, while boosting your pension pot.

Basic-rate taxpayers save 8% in National Insurance, while higher earners save 2% on income above £50,270. Not all employers offer salary sacrifice, so it’s worth checking your options.