A “Robin Hood”-style pensions revolution which is expected to be announced in George Osborne’s Budget later this month, will decimate the retirement funds of young professionals, including lawyers, doctors and accountants, hitting them eight times harder than their parents’ generation.
Meanwhile, millions of people could be forced to work until they are 75, the UK Government has hinted as details of a review into the state pension age were published.
Those under the age of about 55 could be affected by the shake-up, which will consider what the state retirement age should be from April 2028. The results will be published next May.
Ministers have announced a radical review of the pensions regime amid concerns that the current system is not “affordable in the long-term”.
The review will be chaired by Sir John Cridland, the former head of the Low Pay Commission, and will assess whether the current pensions system is “affordable in the long-term”.
The current state pension age is 65 for men and 60 for women, and is due to rise for both to 66 by 2020. It is due to increase to 67 between 2026 and 2028, and will be linked to life expectancy afterwards.
The Office for Budget Responsibility, the financial watchdog, has forecast that the pension age will have to rise to 69 by the late 2040s before increasing again to 70 by the early 2060s.
Meanwhile, millions of middle-class workers will face a “retirement crisis” if George Osborne pushes ahead with a multi-billion pound raid on pensions, a new analysis has found.
The Chancellor is considering plans to end more generous rebates for higher rate taxpayers on pension contributions and replace them with a flat rate of relief which could be as low as 20 per cent. The move could save the Treasury an estimated £6 billion.
However, an analysis by Hymans Robertson, one of Britain’s biggest pension consultancies, found that two thirds of higher rate taxpayers – equivalent to 3.2 million people – are currently not saving enough for their retirement.
It said that a decision to scrap higher rate tax relief on pension contributions would “penalise” middle class savers even further and discourage them from putting aside sufficient money for their retirement.
Conservative MPs have warned Mr Osborne that he will face a “riot” if he pushes ahead with the plans with a significant backlash from Tory voters.
Sir Alan Duncan, a former minister, said: “What is really important for the future is that we have stability, no retrospective adjustments and a system that encourages people to put a lot of money away for the future.
“You can’t plan for a pension if you are halfway through doing it and someone pulls the rug from beneath you.”
Under official measures, the majority of higher rate taxpayers are considered to have an “inadequate” level of savings if their income in their retirement is less than half the salary they enjoyed when they were working.
It found that 69 per cent of those paying the 40p rate of tax are unlikely to have enough income when they retire. Basic rate taxpayers are also struggling to save enough for their retirement, with 62 per cent failing to put enough aside.
By contrast 39 per cent of additional rate taxpayers – those paying the highest level of tax – will have “inadequate” levels of savings while the figure for those paying no income tax is less than 10 per cent.
It warned that hitting higher rate taxpayers by withdrawing relief will increase pressure on the state when they retire.
It said: “As shortfalls in pension income put pressure on future Governments to provide higher state benefits for the elderly, any policy changes which reduce pension incomes are unlikely to reduce overall Government spending over the long-term.”
It is recommending that Mr Osborne should limit the highest level of tax relief on pension contributions to 33 per cent. Basic rate taxpayers would receive tax relief at their marginal rate, 20 per cent.