The UK retirement income received a score of 71.6 on the 2021 Mercer CFA Institute Global Pension Index, earning it a grade of B and deeming it a system that has a sound structure, with many good features but some areas for improvement. It is based on a number of tiers:
- State pension programs
- Second state pension
- National Employment Savings Trust (NEST)
- Private savings opportunities
State Pension Programs
State Pension programs include the Basic State Pension (gradually replaced by a new State Pension) and means-tested benefits.
- The Basic State Pension (BSP) is a pay-as-you-go system. Only men born before April 6, 1951, and women born before April 6, 1953, are eligible for BSP. UK citizens born on or after those dates are eligible for the new State Pension (see below). The maximum weekly benefit for the new State Pension is £129.20 with a complete contribution record. The State Pension age is currently 66 for both men and women and will increase incrementally to 67 by April 2028. The State Pension age is the earliest to claim the Basic State Pension. To get the full new State Pension, an individual must have paid into National Insurance contributions or credit for 30 qualifying years. A worker usually needs at least 10 qualifying years on a National Insurance record to get any State Pension. For those who lack sufficient contribution years, it will be possible to pay voluntary contributions to buy more qualifying credit years. Deferral options include an enhanced pension or a taxable lump sum with a non-enhanced pension. The basic State Pension increases every year by whichever is the highest of the following: the average percentage growth in wages (in Great Britain), the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI) or 2.5%.
- The New State Pension (also referred to as the single-tier pension) is in effect for anyone who reaches State Pension age on or after April 6, 2016. The eligible retirement age is the same as the State Pension age. Benefits are based on the number of contributions made before reaching retirement. The maximum weekly benefit for the new State Pension is £177.10 (2021/2022) with a complete contribution record. To get the full new State Pension, an individual must have paid into National Insurance contributions or credit for 30 qualifying years and usually needs at least 10 qualifying years on a National Insurance record to get any State Pension. The full weekly rate for a pension based on a late spouse’s or civil partner’s National Insurance contributions is £129.20 and £77.45 for a current spouse’s or civil partner’s National Insurance contributions. The full weekly rate for a non-contributory pension is £77.45. Should someone decide to defer his or her pension, benefits will increase by 5.8%, and lump sum payments will not be available.
- The Pension Credit is a means-tested benefit comprising the Guarantee Credit and the Savings Credit. The Guarantee Credit, paid to those who reach State Pension age, guarantees a minimum weekly income of £177.10 for single people and £270.30 for couples. The Savings Credit is available to retirees who made some private retirement savings. This credit provides a maximum weekly benefit of £14.04 for single people and £15.71 for couples. Under the Pensions Bill 2013, the Savings Credit is abolished for anyone who reaches State Pension age after April 6, 2016.
Summary Sources
AgeUK. “Factsheet: State Pension.” April 2019. Accessed 03/31/2020.
AgeUK. “NEST: all you need to know.” Accessed 03/31/2020.
AgeUK. “What the Budget Means for You.” March 2018. Accessed 03/31/2020.
GovUK. “Pension Credit.” Accessed 03/31/2020.
GovUK. “The Basic State Pension.” Accessed 03/31/2020.
National Employment Savings Trust. “Auto enrolment.” Accessed 03/31/2020.
National Employment Savings Trust. “Contributions” Accessed 03/31/2020.
National Employment Savings Trust. “Taking your money out of NEST.” Accessed 03/31/2020.
OECD. “Pensions at a Glance 2021: Country Profiles – United Kingdom.” December 8, 2021. Accessed 04/06/2022.
Current Issues
In November 2021, the government opened for consultations proposed changes to the regulatory charge cap that applies to the default funds of occupational DC pension schemes used for automatic enrolment, also known as NEST. The goal of these consultations was to inform the government about how they can help DC schemes access illiquid assets that have potential positive outcomes for plan members, while ensuring that they remain protected from high fees and undue risk. Previous consultations have found that the charge cap can sometimes prevent trustees from exploring potentially advantageous investment strategies in fear that they may incur fees that would breach the cap, and that many stakeholders and trustees were in favor of providing flexibility in the charge cap when it came to fluctuating performance fees.
The government is now seeking consultations on their proposal to remove performance fees from the charge cap. The current cap is set at 0.75% of the assets in a member’s account. Some charges, like transaction costs, are already excluded from the charge cap, and smoothing is already allowed for performance fees within the charge cap.
The consultation period closed on January 19, 2022. While the government has reported that they’ve received a mixture of responses, they have been overly positive and the government is planning ahead on implementing the change. The report following the results of the consultations is yet to be released.
Summary Sources
“Consultation on enabling investment in productive finance.” Department for Work and Pensions, UK Government. Updated March 30, 2022. Accessed 04/06/2022.
Cumbo, Josephine. “UK to push ahead with reform to pension charges despite backlash.” The Financial Times. March 29, 2022. Accessed 04/06/2022.
“Reforming the DC charge cap – DWP consults.” Simmons-Simmons. December 2, 2021. Accessed 04/06/2022.
Current Issues
According to a 2019 “How the UK Saves” report released by the NEST Insight Unit in conjunction with Vanguard auto-enrollment is succeeding in giving more members the ability to save for their retirement. The numbers are suggesting a positive result. NEST is serving nearly 8 million members from more than 800,000 employers. About 9 in 10 workers at medium and large companies are now contributing to a retirement plan through NEST, and the participation rates jumped 37% after auto-enrollment was implemented. Smaller employers saw a 44% increase, with around 70% workers currently enrolled in a plan.
In addition, the NEST Insight Unit started exploring future program reforms to address challenges which include increasing participant engagement, exploring the best retirement income products to meet participant needs, diversifying investment approaches, targeting overall financial well-being of savers, and considering ways to reach workers in nontraditional jobs. Due in part to these challenges, the NEST Insight Unit launched a research trial at the end of 2018 testing a “sidecar savings model,” which allow savers access to a liquid account for emergencies. This tool allows users to build up emerging savings and then once a savings target has been reached to set more aside for retirement. The initial phase of the trial, having been completed by January 2021, found that 6 in 10 employees think the savings tool could be helpful, which increased to 8 in 10 employees of those struggling financially. Even though the tool allows for users to “set and forget,” users continued to actively use their accounts and adjust the amount they are saving. Despite withdrawals from the accounts over the trial period, savings on average continued to rise, which suggests that the tool could be helpful in reaching users’ target savings and then increase contributions to workplace pension plans.
During the Pandemic, NEST also found that users did not significantly change their voluntary retirement savings behaviors. There was a slight increase in the percentage of people choosing to opt-out of retirement plans (from 10% at the end of 2019 to 12-13% in 2020), but has since returned to normal rates in 2021.
Summary Sources
Anticipating Some Challenges Will Strengthen the Foundation for Continued Success.” Georgetown University Center for Retirement Initiatives. November 2018. Accessed 10/30/19.
“The Mercer CFA Institute Global Pension Index 2020.” The Mercer. 2020. Accessed 06/22/2021.
NEST Insight. “Auto enrolment remains resilient through pension contribution rise and global crisis.” February 10, 2021. Accessed 07/27/2021.
NEST Insight. “Encouraging early indications from sidecar trial show financially ‘struggling’ and ‘squeezed’ brought into saving.” July 8, 2021. Accessed 07/27/2021.
NEST Insight. “The UK pension reforms (1997-2015)” Accessed 03/31/2020
NEST Insight. “Pension Reforms in the UK: In conversation with Nick Pearce and Will Sandbrook.” Accessed 03/31/20.
NEST Insight. “Liquidity and workplace pensions.” Accessed 10/30/19.
“Policy Responses to COVID-19.” International Monetary Fund. Last updated June 10, 2021. Accessed 06/22/2021.
Will Sandbrook. “The Next Generation of NEST Program Reforms in the UK:
“United Kingdom Government and Institution Measures in Response to COVID-19.” KPMG. Last updated September 9, 2020. Accessed 06/22/2021.
Vanguard & NEST Insights. “How the UK Saves 2019.” 2019. Accessed 10/18/2019.
Source: Georgetown University’s Center for Retirement Initiatives
Last Updated 4/6/22