Waiting longer for a state pension
We’re all living longer, and that’s good news, but one consequence of better life expectancy is a rising cost of providing a pension.
The government faces this challenge too, with longer lives resulting in a higher cost of providing a state pension.
Following a recent review, the Cridland report, the state pension age is due to be increased again.
It was already due to rise to age 68, but that rise will now take place earlier; phased in between 2037 and 2039, rather than from 2044 as originally planned.
So if you’re in your late thirties to mid forties, you’re going to have to wait longer before you start to receive a state pension. Those affected are between the ages of 39 and 47.
If you were born between 6th April 1970 and 5th April 1978, this measure is for you.
Announcing the age rise, Secretary of State for Work and Pensions, David Gauke said:
“As life expectancy continues to rise and the number of people in receipt of state pension increases, we need to ensure that we have a fair and sustainable system that is reflective of modern life and protected for future generations,”
Now I’m 38 years old, which means I don’t yet know what my state pension age will be. In fact, anyone 38 years old or younger today will have to wait for further policy announcements in order to find out when their state pension will begin.
Here’s why they are making the change – it’s going to save the taxpayer a lot of money.
Bringing forward the rise in the state pension age to 68 by seven years is forecast to save the taxpayer £74bn by 2045/46.
The government was originally due to spend 6.5% of GDP on the state pension by 2039/40. Making this change will reduce the spend from 6.5% of GDP to 6.1% of GDP.
Some commentators agree with the change, others are less impressed.
Former pensions minister Steve Webb, who is now Director of Policy at Royal London, said:
“The government is right not to have left this increase in the pension age until the mid-2040s. Without this decision people of working age would have faced a heavy tax burden.”
In the less enthusiastic camp is TUC General Secretary Frances O’Grady, who said:
“Hiking the state pension age risks creating second-class citizens.
“In large parts of the country, the state pension age will be higher than healthy life expectancy. And low paid workers at risk of insecurity in their working lives will now face greater insecurity in old age too.
“A decent retirement is a right for us all, not a privilege for the few. Rather than hiking the pension age, the government must do more for older workers who want to keep working and paying taxes. Workplaces and working patterns need to adapt to their needs.
“And the government must follow the independent review’s recommendation to give more help to those unable to stay in work until retirement age.”
O’Grady articulates one of my concerns about the rising state pension age. On one hand it’s increasingly unaffordable to maintain a lower state pension age, but staying in work until age 68 (or later) won’t be an option for a growing number of people.
Life expectancy is rising but healthy life expectancy isn’t keeping pace, so we’re spending longer on average not in good health. For people working in manual occupations and living in more deprived parts of the country, this is a serious issue.
Keep in mind that this accelerated state pension age timetable does not change your retirement age; you still get to decide when you will retire.
It does highlight the importance of making your own provision for later life, rather than relying on the state to provide an income.
Pete Glancy, Head of Policy Development at Scottish Widows, said:
“The Government announcement that the state pension age increase will be brought forward by seven years highlights the need for people of all ages in the UK to prioritise making additional provision for retirement. This is crucial to avoid an unexpected shortfall – or a need to continue working beyond our desired retirement age.
“The 2017 Scottish Widows Retirement Report shows that the number of people saving adequately for retirement, which means putting away at least 12% of their income including employer contributions, has stalled at 56% for the third year running. Whilst it’s clear that auto-enrolment has been a success in kick-starting the savings habit for millions, it may well be lulling people into a false sense of security that they are putting away enough.
“While personal pensions have been seen by many as a means to top-up an income from the State Pension, we expect people will be increasingly looking to use their own savings to retire earlier than their State Pension age. Our research shows the average age at which people would like to retire is 63.”
You could never rely on the state pension to give you a decent standard of living in retirement. Recent changes to the state pension age mean relying on it at all, especially if you’re 38 years old or younger, doesn’t make much sense either.
Of course all of this is hugely political and policy around state pension age could change with any future changes in government.
In the medium term, expect to see more changes introduced and also, possibly, changes to the minimum age at which you can draw from pension pots. This is currently set at age 55, which feels remarkably young in light of a state pension age of 68 and rising life expectancy.