Older middle class earners should be made to contribute more to their pensions, Rachel Reeves has been told.
The Institute for Fiscal Studies (IFS) has urged the Chancellor to increase minimum pension contributions in order to prevent a retirement crisis.
Between 30pc to 40pc of private sector workers – five to seven million people – are currently heading for a disappointing income in retirement, according to its research.
However, the influential think tank said only higher earners and those over the age of 50 should be required to save more into their pension. This is because lower earners could struggle to cope with a drop in their take-home pay.
Auto-enrolment was introduced in 2012 to help more people save for later life. Under the current rules, the default pension contribution is 8pc, with at least 3pc coming from the employer and the rest from the employee.
Workers earning more than £35,000 could see default contributions rise from 8pc to 12pc under the IFS’ proposals. As a result, the worker’s minimum contributions would rise from 5pc to 9pc.
However, workers could be given the choice to lower their contributions.
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Matt Calveley, of pensions advice firm Isio, said: “Employees should have the option to ‘opt down’ to lower contributions while still benefiting from employer support.”
The IFS also said 3pc employer contributions should be made universal for almost all workers. This would boost employers contributions by £4bn a year, according to its analysis.
David Sturrock, of the IFS, said: “There is a strong case for almost all employees to receive an employer pension contribution, irrespective of whether they make a contribution themselves. That would be a bigger change to the system – and one that would likely be of particular benefit to many low earners.”
In addition, the think tank recommended lowering the auto-enrolment age from 22 to 16.
Workers that are currently under-saving into their pension could be up to £1,400 to £2,100 per year richer in retirement because of its suggested reforms, the IFS said.
But it comes as Ms Reeves is also pressure to scrap pension tax relief for higher earners. Together with increased pension contributions, higher earners could find their incomes significantly squeezed. Savers currently enjoy 20pc tax relief on pension contributions with an extra 20pc available for higher earners.
The Chancellor has also been told to limit the amount that retirees can take from their pension pots tax-free.
Currently savers can access 25pc of their retirement pots tax-free at age 55 up to a value of £286,275. But the IFS has called on Ms Reeves to cap this at £100,000 in order to raise around £2bn a year for the Treasury.
In August the Government launched a pension review, with the first stage focusing on boosting investment and the second on improving retirement adequacy.
