The DWP is looking again at the state pension age which it last reviewed with the help of John Cridland six years ago. The reason for the review is to look both at how long we live and work. Cridland determined that the state pension should target providing income for a third of our lives. The Treasury have since said that it thinks the target should be 32% not 33.3% of our lives. The lower the target, the later state pension age should be.
This may seem a very odd way of deciding when to start paying a pension, I am sure that very few individuals or their advisers work on this basis, mainly because (unless we are a Sicilian actuary), nobody knows how long you’re going to live. We don’t have perfect information.
But Government’s do have perfect information. They have the Office of National Statistics to tell them how long we are living and the proportion of the adult population that is at work. The number of working age people to every pensioner, or the “old age support ratio”, is forecast to fall to 2.9 by 2050, from 3.3 in the mid-1970s to 2006.
The DWP were looking to put the state pension age up to 68 from between 2044 and 2046 but are now considering bringing this forward
This is partly down to “fertility”. We simply do not have as many children as we used to do and the children born in the 1950s and 1960s are living longer than expected. It’s also down to the time in our lives we spend productively working – or better put – paying national insurance. We are spending less time working as we retire earlier and stay in education longer. So there’s less of us paying national insurance supporting a generation that is living longer.
That’s why the Treasury are looking to decrease the amount of time, tomorrow’s taxpayers pay for today’s pensioners. Between 2010 and 2020, women saw an incremental rise in their state pension age from 60 to 65, since then both men and women have seen the state pension increase to 66 and people retiring from 2026 to 2028 will get their first state pension payment somewhere between their 66th and 67th birthday. The DWP were looking to put the state pension age up to 68 from between 2044 and 2046 but are now considering bringing this forward so that the next increase begins for everyone born after April 1970.
The actuarial firm, LCP, estimates that collectively, these changes to the state pension age will save the national insurance fund £200bn. This is a staggering amount of money and shows just how important the state pension is to Britain’s retirees. According to ONS data, the state pension amounts to over 50% of a man’s income from state pension age, for women it’s over 60%.
These figures may come as a surprise to many advisers and their wealthy clients for whom the state pension may represent a small fraction of their income and total net worth in later years. It is a sad fact that the majority of people who rely on the state pension for the bulk of their retirement income, do not visit financial advisers.
But they form the majority of our adult population and the demand from funding their pensions impacts the wealthy through taxation. Only a small proportion of the increased costs of an ageing population can be mitigated by changes to the state pension age, the other levers that the Government can employ to reduce the cost of the state pension are to suspend or abolish the triple lock , an arrangement that increases state pensions each year by 2.5%, CPI or earnings, whichever is higher. This year the earnings link has been suspended, which is proving highly unpopular.
If for political reasons, the Government feels unable to suspend the triple lock or even push back state pension ages, its only recourse is to taxation. Squeezing taxes on the working population to pay for baby boomers’ benefits is not going down too well today, with the recent increase in national insurance an example. The threat to the well-heeled retiree is more likely to come from a taxation on post retirement income. Currently there is no national insurance on pensions and wealth taxes such as IHT and CGT, most of which are paid by pensioners, are low. But if the State Pension continues to grow as a liability to the DWP and so to the Treasury, it is likely that progressive taxes are levied , transferring wealth from the well-off to pay for the increased cost not just of pensions but of care as well.
So the state pension could end up being rather more important to the wealthy pensioner than has generally been thought. Advisers would do well to familiarise themselves with the terms of the debate so they can explain the risks as well as the rewards of state pensions.
And in doing so, advisers can look again at the three essential truths of retirement planning. To ensure adequate retirement incomes for ourselves we need to work longer, save harder and pay more taxes. We are working shorter and retiring for longer, explaining to clients why taxation is going up, can be done quite easily, when you understand the issues surrounding the state pension