One of the most significant issues to emerge from the Autumn Statement was a further rise in state pension age. The Government unveiled plans to bring forward the increase in the age at which the state pension will be received. The state pension age will now increase from age 68 in 2036, affecting anyone who is aged 46 or under today. The state pension will then reach age 69 in 2049, affecting today’s 33 year olds.
The changes will affect both men and women. Women in their fifties have already been disproportionately impacted by the increase in state pension age. A woman born in 1951 would already have begun to receive her state pension aged 61, back in 2012. Conversely, a woman born in late 1954 will not receive her state pension until age 66 in 2020. Once the pension age for men and women is equalised in 2018, the state pension age will then rise, reaching 66 by 2020, before increasing further in future years.
The Government has made these changes as there are no longer sufficient taxpayers to support the number of pensioners. The impending retirement of the large “baby-boomer” generation has brought this issue into focus. In addition, life expectancy increased dramatically throughout the 20th Century. The first state pension was introduced in 1908 and was only paid to people aged 70 or more. At that time, only one in four of the population reached aged 70, and life expectancy at that age was just nine years. Life expectancy in retirement is now around 20 years. It was not until 1940 that the state pension age was reduced to 65 for men and 60 for women.
The current state pension will also be reformed into a flat rate scheme known as the single-tier state pension, which comes into effect in 2016. When this was announced the pension was set at £144 per week, and this figure is intended to increase with inflation each year. It is worth considering how much it would cost an individual to “buy” the same level of income from the open market, through the purchase of an annuity. Purchasing such an annuity for a 65 year old would require a pension fund of around £201,800. The same annuity for a 68 year old would require around £181,300. Whilst this calculation is rather crude, it could be argued that delaying the state pension age presents a saving for the Government of around £20,500 per pensioner. Further changes to the state pension age cannot be ruled out as the Government attempts to tackle the fiscal deficit and the national debt.
Recent years have seen the introduction of pension autoenrolment. All employers now must enrol the majority of their staff into a personal pension arrangement. Employees are able to opt out, but must take certain steps in order to do so. The change to state pension benefits, combined with the introduction of auto-enrolment, allow the Government to place the onus on individuals to provide for their own retirement. A number of further proposals for changing the state pension age have also been suggested by various politicians. Such suggestions include calculating state pension age based on region or occupation. It remains to be seen if any of these proposals come into force.
The state pension age is a major factor in determining when people retire, with the majority of annuities historically purchased at state pension age. Retirees may therefore be at the mercy of future Government policy if they have not taken steps to provide for themselves through private pension arrangements or other savings. Government policy is moving away from the “cradle to the grave” approach and towards greater personal responsibility. At Bond Dickinson Wealth Limited our pension specialists can provide advice to ensure that your pension fund is well invested, well funded and used to release income in the most appropriate way.