Economists have outlined what retirement incomes could look like for 'middle earners' under the state pension triple lock changes proposed by Andy Burnham.
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incomes → outline → Burnham
The triple lock ensures that the state pension goes up by inflation, wage growth, or 2.5 per cent, whichever is highest.
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whichever → ensure → inflation
Andy Burnham has announced that from April 2030 the state pension will continue to rise every year by inflation or by the 2.5 per cent figure.
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pension → announce → figure
The triple lock will change to a double lock, though earnings may still play some role in the calculations.
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earnings → change → calculations
The earnings element is important because in some years the current triple lock has meant the state pension has risen faster than earnings.
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pension → mean → earnings
Labour said the changes would save £15billion a year by the late 2030s and help partially fund a social care service.
But the Institute for Fiscal Studies has said that future savings are 'very uncertain', adding that the change 'could easily save nothing at all if earnings growth is strong'.
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growth → say → nothing
A new report suggests how middle earners only adding the minimum permitted contribution to their work pensions via auto-enrolment could be negatively affected by the proposed changes in later life.
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earners → suggest → life
Middle earners will need more than just minimum contributions via auto-enrolment post April 2030, a report says
Will middle earners struggle more financially in later life?
Economist Carl Emmerson, a partner at London Economics, and his colleague, Max Molaro, have written a report, What's next for automatic enrolment in workplace pensions?, on behalf of People's Pension.
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What → need → Pension
The findings showed that, under the proposed changes, the state pension would reach about 30 per cent of working people's median earnings, 'halting its growth in value'.
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pension → show → value
The report warned that people's savings will need to increase to hit the same level of overall retirement income.
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savings → warn → income
In the report, middle earners were defined as people earning the equivalent of a full-time employee on the National Living Wage, at just under £25,000 for a 37.5 hour week, up to around £65,000 per year.
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earners → define → year
Target Replacement Rates (TRR) are a percentage of pre-retirement earnings someone would need to replace to meet an adequate income in retirement.
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someone → need → retirement
For someone earning £40,000 a year, retiring at 63 and saving at the legal minimum level via auto-enrolment, the report said retirement income would replace around 62 per cent of their previous take-home pay if the current state pension triple lock was maintained.
But, this, according to the analysis, would drop to around 55 per cent under the proposed reformed triple lock, which would only see the state pension rise in line with earnings over time.
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pension → earn → time
The report said someone working for about £40,000 a year would typically need the state pension to replace about 74 per cent of their previous take-home pay to maintain their standard of living.
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pension → say → living
The report added that this 74 per cent TRR figure would increase once the new reformed state pension took hold post-2030.
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pension → add → hold
Currently, when you are auto-enrolled into a pension at a workplace, a minimum of 8 per cent of your qualifying earnings must go into your pension.
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minimum → enrol → pension
This amount is split between you and your employer.
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amount → split → you
Your employer must contribute a minimum of three per cent, though some employers might contribute more.
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employers → contribute → more
As well as being hit by proposed changes to the triple lock, the report also found that middle earners were the group where evidence of pension under-saving was worst.
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evidence → hit → saving
Official estimates previously showed that around 40 to 50 per cent of middle earners were not on track to meet their target wage replacement level via the current triple lock, with the outlook worsening under the proposed reformed triple lock.
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outlook → show → lock
How lower earners will be affected
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earners → affect → ?
According to the analysis, someone earning £20,000 a year and adding the bare minimum to their work pension would, if they retired at 63, replace 83 per cent of their wages with the state pension under the proposed reforms from April 2030, down from the current replacement rate of around 100 per cent.
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they → accord → cent
Referring to the current triple lock and the one from April 2030, the report said: 'In contrast, middle earners are at greater risk of a low retirement replacement rate under either uprating system.'
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earners → refer → system
But the report flagged how the earnings component of the reformed triple lock post April 2030 would affect lower earners.
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component → flag → earners
It said: 'Separately, under the adjusted triple lock, the State Pension will no longer rise relative to earnings after 2030.
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Pension → say → 2030
This narrows the margin by which many earners would otherwise exceed their target replacement rate, and strengthens the case for some additional private saving towards the top of this group.
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earners → narrow → group
The report said that lower earners with higher income partners would 'narrow the gender pension wealth gap' if they saved more into pensions.
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they → say → pensions
But, for people earning below £10,000 a year with a partner who is not working or is also in a low-paid job, the analysis suggests focusing on more immediate financial needs over pensions.
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analysis → earn → pensions
The economists said: 'While these individuals would benefit from higher retirement incomes, they could be better off having that income to support their immediate living standards today.'
If you earn less than £10,000 but more than £6,240 a year, you can ask to join your employer's auto-enrolment pension scheme.
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you → say → scheme
The employer cannot refuse and must also contribute to the work pension.
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employer → refuse → pension
A chart showing if people on different incomes can achieve their Target Replacement Rate under the current and proposed state pension regime after April 2030
We can be 'less concerned' about higher earners, report says
The report said that 'many' higher earners were also undersaving via pensions.
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earners → show → pensions
It said that if a higher earner only utilised the minimum contributions to a pension via auto-enrolment, this would leave them 'falling well short of their full TRR'.
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this → say → TRR
Around half of higher earnings are not on track to meet their target TRR, the economists said.
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economists → meet → TRR
To increase pension saving among higher paid people, the report's authors said the upper threshold for qualifying earnings should be increased to about £65,000, and then indexed in line with growth in average earnings to maintain its relative value.
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threshold → increase → value
Currently, the upper threshold for qualifying earnings via auto-enrolment is £50,270, but employers can opt to contribute above this level.
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employers → qualify → level
The report for People's Pension added that 'policymakers can be less concerned' about higher earners than other groups.
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policymakers → add → groups
It said: 'A shortfall for a higher earner may be less costly in welfare terms than for others, as their absolute income in retirement will still be higher than that of most of the population.
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income → say → population
'Moreover, the income tax system provides them with a strong financial incentive to save more than the minimum amounts via up-front tax relief.
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system → provide → relief
Higher earners were also more likely to get higher employer contributions added to their pension pots than others, the report added.
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report → get → others
If you pay income tax at 40 per cent or 45 per cent, you are entitled to more than the standard 20 per cent pension tax relief.
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you → pay → relief
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