Pensions gap exposed: How you could be paying six times more to get the same pension as a civil servant

Treasury civil servants tasked with steering the Chancellor through the Budget have reportedly whispered suggestions in her ear that she should exclude her pensions from her huge tax raid.

And is it any wonder, when they and other public sector workers participate in Britain’s most gilded pension schemes?

Civil servants receive six times the pension income of private sector workers for every pound they put away during their careers.

For years, gold-plated public sector pensions have been the envy of Britain’s workforce, paying a guaranteed retirement income that is protected from the ravages of inflation.

Today, with help from industry experts, we reveal the shameful gulf between generous public sector pensions and poor private sector schemes – and how much it could widen after this week’s Budget.

On Wednesday, Ms Reeves is expected to introduce a new National Insurance (NI) levy on the contributions employers pay into workers’ pensions – raising around £15.4bn for the Treasury.

But last week it emerged that public sector workers are likely to be shielded from the raid, leaving those in the private sector to bear the brunt of the huge fiscal impact.

Pensions industry leaders agree that this would inevitably lead to lower retirement incomes for those working in the private sector. Meanwhile, workers with the most generous pensions, who are in line for a much more comfortable retirement – ​​mostly on the taxpayer’s dime – would not be affected.

Exclusive analysis for The Mail on Sunday by wealth manager Quilter confirms the extent of the stark divide.

Civil service and local government workers receive up to £10.63 and £9.24 respectively in pension benefits for every £1 they save early in their career. Meanwhile, NHS health workers receive £5.57 for every £1 they are paid.

In contrast, most workers in a typical private sector pension receive between £1.75 and £2.18 for every £1 they put towards 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 who rely on a private workplace pension have no such protection against inflation and are not guaranteed a certain income in retirement. The amount of pension income they receive will depend on the vagaries of the stock market.

Most private sector workers save in modern “defined contribution” pensions, where the responsibility for turning a pension plan into retirement income rests with the individual, rather than the company they work for.

Employers are required to pay into these pension funds each year the equivalent of just 3% of their staff’s wages. Many will agree to pay above this minimum, at a rate of 5 to 8 percent, which is considered generous.

But this is a far cry from the actual rate employers pay for public sector workers’ pensions.

On average, civil servants receive a significant employer contribution of 28.97 percent, while police officers receive 35.3 percent. Doctors and health workers receive a generous 23.7% of the NHS pension scheme and teachers see 28.68% of their salary paid into pensions.

Note that these pensions are all “unfunded”, meaning they are largely funded by the taxpayer.

And the already huge discrepancy in employer contributions could grow.

Experts have warned that if employers are required to pay NI on workers’ pension contributions, it could make their schemes less generous or reduce pay rises to offset the costs.

Almost half of employers who pay staff more than the minimum pension will consider reducing contributions if the chancellor introduces NI for pension payments, according to a survey 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 consider themselves lucky to get 8% from their employers, for example, could see this reduced to 3% – the minimum allowed.

Workers in a typical private sector pension whose employers pay 5% of contributions currently receive £2.18 for every £1 they put towards retirement.

But if their employer reduced this to just 3%, they would receive just £1.75 for every £1 they save in retirement, Quilter’s analysis found. That’s 20 percent less in retirement income.

Jon Greer, head of retirement policy at the wealth manager, says: “This move effectively creates a dichotomy between ‘good’ and ‘bad’ wealth, suggesting it is acceptable to tax private sector workers while protecting their public sector counterparts .

“If public sector workers were not protected by this change, they would face impacts similar to those identified for the private sector, such as increased costs for their existing pensions and potential reductions in pay growth.”

Calculations by investment platform AJ Bell find that someone earning £35,000, whose pay rises by 2% a year, would be £177,000 worse off after 35 years if their employer reduced the amount they it pays for pension from 8% to the minimum. of 3 percent. Someone earning £60,000 today would be £303,000 poorer in retirement.

If this happens, workers will get even less in retirement for every pound they save in retirement, and their money won’t work as hard for itself.

For a long time, the generosity of public sector pensions was justified by the suggestion that staff should receive less pay during their working lives.

But the official earnings figures show that this is a myth.

According to the Office for National Statistics, 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 “irreparable” and would “wreak havoc” on UK pensions.

She added: “Forcing all taxpayers to pay employer NI contributions to these already hugely generous pension arrangements is patently unfair to private sector employers and workers and further entrenches inequalities in pension provision for the workforce.”

AJ Bell’s Tom Selby says: “The fact that these types of (defined benefit) pensions have all but disappeared in the private sector shows how generous – and expensive – they are.

“They cost so much to administer that only the state feels it has the ability to provide them to staff because it has a whole country supporting the costs.”

[email protected]