the contribution rate should be gradually increased. Under the current planned 8 per cent contribution rate, a worker earning £27,000 annually over a 40-year career would only save around 55 per cent of what he or she needs to generate the Department for Work and Pensions’s recommended target replacement income. A 12 per cent contribution rate – introduced gradually, and made compulsory – would achieve that target replacement income. Finally, individuals should have to contribute funds into a personal pot as they work, covering their financial needs for periods of unemployment in place of Jobseeker’s Allowance. The pot would act as a flexible fund, with people able to draw down on it throughout their working life to support career transitions and retraining, while any remaining balance would be added to a pension upon retirement. The cost to workers would be offset by a reduction in National Insurance contributions. Any political party could sell these reforms as a package, telling voters that they could save more free from tax, build up bigger pension pots, own shares in a company – potentially for the first time – and see their savings grow through their contributions to the welfare state. Savings policy has come a long way in the last 20 years, but it needs to go much further.
Steve Hughes is head of economic and social policy at Policy Exchange.