Pension chasm exposed: How you could pay SIX times more to get the same retirement as a civil servant

Pension chasm exposed: How you could pay SIX times more to get the same retirement as a civil servant By Jessica Beard Updated: 21:45 EDT, 26 October 2024 e-mail View comments It seems that Treasury civil servants tasked with steering the Chancellor through the Budget have been whispering suggestions into her ear that she should exclude their pensions from her whopping tax raid. And is it any wonder, when they and other public sector workers are sitting on Britain's most gilded pension schemes? Civil servants receive a retirement income that is six times larger than private sector workers for every £1 they set aside during their careers. For years, the public sector's gold-plated pensions have been the envy of the British workforce, paying out a guaranteed income in retirement that is protected from the ravages of inflation.

Today, with the help of industry experts, we lay bare the shameful chasm between generous public sector pensions and the meagre schemes in the private sector – and how much larger it could grow after this week's Budget. How much will your savings pay in retirement? What £1 invested early in your career will be worth over a 20-year retirement On Wednesday, Ms Reeves is widely expected to charge a new National Insurance (NI) levy on the contributions that employers pay into workers' pensions – raising an estimated £15.4 billion for the Treasury.



But it emerged last week that public sector workers are likely to be protected from this raid, leaving those in the private sector to bear the brunt of the enormous tax hit. Pensions industry leaders agree this would inevitably result in smaller retirement incomes for those who work in the private sector. Meanwhile, workers with the most generous pensions who are in line for a far more comfortable retirement – mostly on the taxpayer's dime – would be unaffected.

Exclusive analysis conducted for The Mail on Sunday by wealth manager Quilter confirms the extent of the stark divide. Civil service and local government workers receive as much as £10.63 and £9.

24 respectively in pension benefits for every £1 they save at the start of their careers. Meanwhile, healthcare workers in the NHS receive £5.57 for every £1 they pay in.

In contrast, most workers in a typical private sector pension get as little as £1.75 to £2.18 for every £1 they set aside for retirement.

State-backed schemes, known as 'defined benefit' pensions, promise to pay a guaranteed income that rises with inflation from the date you retire until you die. In contrast, most people dependent upon a private workplace pension have no such protection from inflation – and are not guaranteed a certain income in retirement. The size of pension income they receive will depend on the whims of the stock market.

Most workers in the private sector save into modern 'defined contribution' pensions, where the responsibility for turning a pension plan into retirement income falls on the individual, rather than the company for whom they work. Employers are obliged to pay the equivalent of just 3 per cent of their staff's salaries into these retirement funds each year. Many will agree to pay above this minimum, at a rate of 5 to 8 per cent, which is considered generous.

Baroness Altmann, a former pensions minister, says: 'Forcing all taxpayers to pay the employer NI contributions for these already hugely generous pension arrangements is patently unfair on private sector employers and workers' But this is a far cry from the effective rate that employers pay into the pensions of public sector workers. On average, civil servants enjoy a sizeable employer contribution of 28.97 per cent, while police officers receive 35.

3 per cent. Doctors and health workers get a generous 23.7 per cent on the NHS pensions scheme, and teachers see 28.

68 per cent of their salary paid into their pensions. Note that these pensions are all 'unfunded', which means they are mostly funded by the taxpayer. And the already enormous discrepancy in employer contributions could grow wider.

Experts have warned that if employers are forced to pay NI on contributions into workers' pensions, they could make their schemes less generous, or curb pay rises to make up for the costs. Nearly half of employers that pay staff more than the minimum pension will consider reducing their contributions if the Chancellor introduces NI on pension payments, according to a poll of business decision-makers by the Association of British Insurers and the Reward and Employee Benefits Association. This means that private sector workers who today count themselves lucky to receive 8 per cent from their employers, for example, could see that slashed to 3 per cent – the minimum allowed.

Workers in a typical private sector pension whose employers pay 5 per cent in contributions currently get £2.18 for every £1 they set aside for retirement. But if their employer cuts this to just 3 per cent, they would get just £1.

75 for every £1 they save into their pension, the analysis by Quilter has found. That is 20 per cent less in retirement income. Jon Greer, head of retirement policy at the wealth manager, says: 'This move effectively creates a dichotomy of 'good' and 'bad' wealth, suggesting it is acceptable to tax private sector workers while shielding their public sector counterparts.

'If public sector workers were not protected from this change, they would face similar impacts as those identified for the private sector, such as increased costs for their existing pensions and potentially reduced pay increases.' Read More Private vs public sector pensions - how to avoid a race to the bottom: This is Money podcast Calculations by investment platform AJ Bell find that someone earning £35,000, whose salary rises by 2 per cent a year, would be £177,000 worse off after 35 years if their employer cut the amount they pay into their pensions from 8 per cent to the minimum of 3 per cent. Someone earning £60,000 today would be £303,000 poorer in retirement.

If this happens, workers will receive even less in retirement for every £1 they save into their pension, and their money won't work as hard for itself. For a long time, the generosity of public sector pensions has been justified by the suggestion that the staff receive a lower wage during their working lives. But official earnings figures show this to be a myth.

According to the Office for National Statistics, the average earnings (including bonuses) in the public sector were £698 a week while private sector workers were paid £669 a week. Baroness Altmann, a former pensions minister, says the move would be 'indefensible' and would 'create havoc' for UK pensions. She added: 'Forcing all taxpayers to pay the employer NI contributions for these already hugely generous pension arrangements is patently unfair on private sector employers and workers, and further embeds inequalities in pension provision for the workforce.

' Tom Selby, of AJ Bell, says: 'The fact that these [defined benefit] types of pensions have all but disappeared in the private sector shows just how generous – and expensive – they are. 'They cost so much to administer that only the state feels it has the ability to offer them to staff, because it has a whole country backing up the costs.' jessica.

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