The proposal would reduce the future pension benefits of these workers in return for increased pay now, in a bid to address ongoing staffing shortages while keeping public spending in check.
Others, however, see merit in the idea, acknowledging that some public sector pensions – including those for teachers, nurses and civil servants – are overly generous and may not be needed by all employees.
After a campaign of strikes over public sector pay in recent years, ministers in 2024 resolved industrial disputes with pay rises ranging from 5.5 per cent for teachers to a 22 per cent two-year rise for junior doctors.
Speaking at the Institute for Government in early December, the civil service’s chief operating officer floated the idea of changing the way officials are paid, possibly including an increase in salary with less generous pensions to compensate.
But multiple Government sources insisted that the suggestion was not being actively worked on and had not been presented to ministers.
A Government spokesperson said: “We are focused on supporting the civil service with the necessary tools it needs to deliver change for working people.”
With the rising cost of living, student loan repayments, and the challenges of buying a home, many are feeling the strain.
‘The long-term loss could dwarf the immediate gain‘
On the surface, a pay bump may feel like a win but trading long-term financial security for short-term relief could leave many in a precarious position later on, Fiona Peake, personal finance expert at brokerage Ocean Finance, said.
“Lowering the value of these benefits – whether through reduced contributions or changes to how payouts are calculated – could have a huge impact on retirement income.”
But if the trade-off involves a reduction in your pension accrual rate, the long-term loss could “dwarf the immediate gain”, Ms Peake said.
“A higher salary now means more take-home pay, but it could also push you into a higher tax bracket or increase your student loan repayments.
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Read MorePensions remain far better for public sector workers than those in the private sector, with Andrew King, retirement planning specialist at Evelyn Partners saying they are “well worth retaining”.
Some mid-ranking staff find they are able to retire on a pension at almost the same level as their salary.
This means that, when taking pensions into account, a worker in the private sector would need to earn £96,800 to match the overall financial value of the official’s £78,500 salary plus pension.
‘It could be beneficial for the Treasury to consider this‘
Although such a change would require a fresh influx of cash from the Treasury to pay larger salaries upfront, Mr King suggested that there could be longer term benefits.
Anne Fairweather, head of government relations and public policy at Hargreaves Lansdown (HL), agreed.
“Reform will be complex as there is no underlying fund outside of local government schemes. But the government is right to think about where the burden should lie.
How could this work and could this lead to higher taxes?
Most public-sector staff build up their pensions each year based on a portion of their income.
If you’re a teacher on £35,000, you’ll get £614 a year – adjusted to increase by inflation plus 1.6 per cent – in retirement, for every year you’ve worked.
As a teacher, you could accrue a lower amount in your pension – say 1/60th instead of 1/57th – and instead get a higher salary. You could also say that staff have to pay less in to the scheme instead, so perhaps 7.6 per cent, instead of 8.6 per cent of their salary.
When you pay into a pension in the public sector, your money, along with your employer’s contributions, is not going into a pot for you in retirement, as they are in the private sector. They are used to pay the pensions of people claiming today.
Sir Steve added: “Are the public going to be happy with a tax rise, because we have a bill for retired people and no money to pay for it?”
Pros and cons of taking a higher salary in return for a lower pension
According to Myron Jobson, senior personal finance analyst, at interactive investor:
Pros
A pay rise provides an immediate increase in your take-home salary, which can help meet short-term financial goals, such as paying off debt and saving for a house With a higher salary, you might have more flexibility to invest or save in other ways – e.g. investing in stocks or propertyCons
With the loss of employer contribution, you could miss out on the valuable benefit, which might have been a better deal in the long run A reduction in the potential value of your retirement nest egg because of the reduced contributions It could lead to tax complications – the increased salary could push you into a higher tax bracket, reducing the actual benefit of the pay rise compared to the pension contributions you would have received For parents, a higher salary could push them into the high income child benefit charge threshold. A higher salary could result in parents becoming ineligible for valuable childcare initiative such as 15- and 30-hour free childcare and the tax-free childcare Read More Details
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