In the Autumn Statement in 2013, a review on the State Pension was announced. In October 2016 an interim report was carried out which gave an indication of the issues that will shape future thinking in areas such as longevity, intergenerational fairness, changing working patterns and obviously, cost.
In my e-book 10 Steps to Financial Success I explain in detail how, when the State pension was introduced in 1908, the average age of death for a male was 67. At that time 40 year careers were commonplace and it was also quite normal for married couples to have between 5 and 10 children. As the state pension is a ‘pay as you go’ system –where current tax payers pay in and current pensioners take it out – it was therefore very affordable for past governments. In fact, it was a nice little earner! They were collecting money for 40 years form a large working population but only had to pay it out for 2 years to a much smaller proportion of society. However, with the demographics today pointing towards a lower working population, an increasing retired population and longevity increasing, it’s not surprising that the Government is reviewing the affordability of the current system. The goalposts have seriously been moved!
Longevity is perhaps the most important factor. A collection of headline statistics from Age UK “Later Life in the United Kingdom” (October 2016) make for ain interesting read:
- 6 million people are aged 65 or over
- Over 1.5 million people are aged 85 or over
- There are more people aged 60 and above than there are aged under 18 (i.e. more than 15 million)
- The number of centenarians living in the UK has risen by 72% over the last decade to 14,450 in 2014
- UK life expectancies at age 65 are 85.9 years for women and 83.4 years for men (life expectancy increased by 1.5 years for males and 1.1 years for females between 2006-08 and 2011-13)
- By 2040, nearly 1 in 4 people will be aged 65 or over
- The proportion of the population aged over 75 is projected to double in the next 30 years
- Nearly 1 in 5 people will live to 100, including 29% of people born in 2011
A key pension concept with the State Pension Age (SPA) is that many people still use this as a marker to make sure that the money they have saved, plus the state benefit, gives them their required living standard. However, this marker is now already moving when The Pensions Bill 2013 made provisions for the increase in the SPA to 67 to be brought forward to between 2026 and 2028, then an increase in the SPA to 68 will come into force from the mid-2030s, and a further increase to age 69 will apply from the late 2040s. Pensions Minister Steve Webb has quoted, “We need to culturally shift to a view where frankly people recognise we cannot have a definite answer on the question of when they will retire because we do not know what’s going to happen to life expectancy. You will know what ballpark you are in but you won’t know exactly.”
It is now quite common to see newspaper headlines like: ‘Work until you’re 80’ (FT March 2016) or, even further, ‘Don’t expect to retire until you’re 100’ (The Telegraph 2015). Indeed, in many headlines, the idea of working until you die and never retiring is becoming more the aim for the future.
So, a few thoughts:
- Is there a point where the SPA could be too high to be realistic?
- Is it likely that general taxation will have to increase in the future, both for ‘receivers’ and ‘contributors’?
- Could the SPA could move to a system where the state pension is means tested?
- How does pushing back the SPA affect those in manual or high stress roles who burn out an earlier age?
Manual workers might start work in their teens acquiring their full entitlement to the state pension at an earlier age than others who have gone on to further education. In this respect, the report has suggested the possibility of replacing the one-off state pension age with a more tailored approach – perhaps by counting the state pension ‘qualifying years’ as they commence. When the full entitlement has been done the benefit could commence if required, even if this is earlier than the state pension age.
Three things are certain:
1) These discussions will continue and recommendations will be made, however, the Government must ensure that any changes are appropriately communicated to those affected so that they can plan for the change.
2) It is unlikely that the State Pension offering will improve for current workers
3) The best way to plan for your retirement is to plan for your retirement! Ideally, start as early as you can as that will put you in the strongest position, but you can always improve your financial position in retirement at whatever age you are.
My free e-book ‘How to retire on time and on target’ will take you through this process. You can get it here when you sign up for my newsletter.