State pension ages are rising across the world, and the UK is no exception. By October 2020 Brits will have to wait until their 66th birthday to start drawing their state pension, and many born in the 60s and 70s will be 67 before they can draw theirs. The final scheduled increase is for 2028, but the government has not ruled out more.
Now the ‘Centre for Social Justice’ (CSJ) founded by Iain Duncan Smith, the former work & pensions secretary, has proposed far steeper increases. It suggests changing the state pension age to 70 by 2028 and to 75 by 2035. The CSJ said, ‘The ageing population and the increasing Old Age Dependency Ratio (OADR) is raising serious concerns about long term fiscal sustainability in the UK. If we expect [the state pension] to continue in the future along with the full functioning of public services … the UK’s fiscal balance must be corrected.’
The OADR measures the ratio between the population of elderly people (65 or over) and those of working age. At present there are just over 28 people over 65 for every 100 people between the ages of 15 and 64. However, the OADR is predicted to hit 48 by 2050. The CSJ says that its proposals are justified because people are living longer, pointing out that average life expectancy was around 50 when the state pension was introduced, but is now 81.
Government policy on raising state pension age
The government was quick to point out that this is not its current policy. A statement issued by the Department for Work and Pensions said, ‘In 2017 we raised the future retirement age to 68 so that it is sustainable now and for future generations.’ Meanwhile Baroness Ros Altmann, a Conservative peer and former pensions minister, called the CSJ proposals ‘chilling and immoral’, warning that it would force people to work into old age, shorten life expectancies and force more to claim benefits.
The CSJ is not an official source of government policy-making. However, it was the first to propose the government’s benefits policy of Universal Credit.
Pension awareness among the public remains low
Any changes in the UK’s pensions regime are likely to catch many by surprise, due to low levels of knowledge on the subject. A recent report by insurance provider Aviva found that millions over the age of 45 are still ‘baffled’ by pensions and think about them little if at all. Two-thirds of workers in this age group say they don’t know how much they need to save for a comfortable retirement, and some 5 million do not even know how much they have already saved into pension pots.
This general ignorance around pensions is a potential time-bomb for today’s workers
The report highlights a dangerous complacency among people less than 20 years from retirement. Given that 40 per cent did not know how much state pension they would receive, it is likely that many are over-estimating the extent to which the state will support them. This general ignorance around pensions is a potential time-bomb for today’s workers, especially if the state pension age continues to rise – making private savings all the more essential.
Lindsey Rix of Aviva said, ‘Without a clear picture of what they currently have saved or might need to save for a comfortable retirement, our findings show many UK employees are approaching retirement with their eyes closed – with no realistic idea of how near or far they are from their destination.’
Why it’s never too late to save a pension pot
The report does however offer some comfort for workers who have fallen behind with their pension saving. It points out that even an employee aged 45 with no private pension savings at all could build a pot worth just over £56,000 by the age of 65, assuming the average UK salary of £28,000 and the minimum worker and employer contributions. Although this would only provide an income of around £2,500 a year over a whole retirement, this would still be a valuable supplement to the state pension (which at maximum is currently £8,777 a year).
Ultimately, the best way to avoid financial difficulties in retirement is to become better informed about pensions and how they work. Whether you are approaching retirement or just starting to save into a pension, seeking professional advice from an independent financial adviser can be very worthwhile.
This article was previously published by Unbiased on 27th August 2019