19 Dec 2011
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Capital Hill
Capital Hill on... state pension age
Think you’ll get your state pension in your early to mid-60s? Think again. The government is accelerating the rise in state pension age so that it hits 67 almost a decade earlier than planned. That means that a 50-year-old today will retire two years later.
The trend for hikes to state pension age is expected to continue, with experts warning that someone aged 40 today shouldn’t expect to receive their state pension until age 68 and those in their early-20s are likely to have to wait until age 71.
Ed Wilson, a director in the pensions practice of accountancy firm PwC, said: “There is a clear direction of travel that means that many of today’s younger employees can expect to be working well into their 70s.
“Equally, people hoping to retire at a particular age are having to revise their plans and are facing a stark choice between working longer, saving more or retiring poorer.”
So, exactly when can you expect to retire and what can you do to keep your retirement dreams on track? Capital Hill takes a look...
Current state pension age
For men born before 6 December 1953, the current state pension age is 65.
For women, the age at which they can claim their old age pension started increasing from 60 to 65 in April 2010, affecting women born on or after 6 April 1950. Under the Pensions Act 2011, women’s state pension age will increase more quickly to 65 between April 2016 and November 2018.
From December 2018 the state pension age for both men and women will start to increase, reaching 66 in October 2020. These changes affect women born on or after 6 April 1953 and men born on or after 6 December 1953.
Looking further ahead, current law already provides for the state pension age to increase to 67 between 2034 and 2036 and 68 between 2044 and 2046. However, in his Autumn Statement, Chancellor George Osborne said it would now rise to 67 between 2026 and 2028. This change is not yet law, and will require the approval of Parliament.
Pensions lottery
The government has continued to favour step changes in the state pension age over more gradual increases – creating something of a pensions lottery.
John Ball, head of UK pensions at Towers Watson, the actuarial consultant, said: “Once the state pension age reaches 66 in October 2020, it will be frozen for five-and-a-half years before rising again.
“This means that people born in 1959 might, on average, be expected to spend an extra six months or so in receipt of their state pension compared with people born in 1961. Winning this year-of-birth lottery can be worth thousands of pounds.”
Annus horribilis
The over-55s are already struggling, and experienced an annus horribilis in 2011, according to Aviva’s latest ‘real retirement’ report.
On average, they have £11,153 in savings and investments, 27% lower than December 2010, as a growing number of people are forced to dip into funds to top-up their income and meet day-to-day costs.
Average annual income among the over-55s has slid 4% in the last year, while inflation has pushed up their cost of living by 5.4%.
At the same time, there has been a decrease in the number of over-55s claiming a state pension (from 61% in March 2011 to 57% in December), and an increase in the number of 65 to 74-year-olds who derive an income from wages and earned income (from 18% in January 2010 to 22% in December 2011), as more and more people are forced to work for longer.
Aviva director Clive Bolton said: “With income levels falling and inflation rising, it’s going to make it difficult for some to maintain their standard of living and to secure a comfortable retirement income for themselves.”
Rising life expectancy
So why is state pension age rising? As medicine advances and longevity increases, funding the state pension has become unsustainable.
“The government has timed the latest increase so that it delays the retirement of the 1960s baby boomers,” said Ball. “Nonetheless, official estimates of life expectancy have increased so much that this group is still expected to claim their state pensions for longer than the last government intended when it told them they would have to wait until 66 before retiring.”
Other countries around the world are also hiking their pension ages. Ros Altmann, director-general of Saga, the financial services company for the over-50s, and a former pensions adviser to the government, said raising Britain’s state pension age to 67 from 2026 is “not far out of line with other nations”.
“Around that time, the US, Netherlands, Germany, Denmark and Spain will all be increasing pension ages to 67 and Ireland’s pension age will be 68,” she said.
Further ahead
How fast could state pension age rise thereafter? Osborne said that further increases would be “based on demographic evidence”. Let’s look at the numbers.
Tower Watson believes it could reach 68 by 2036. Ball said: “Average lifespans from age 67 in 2028 are expected to be 21.4 years for men and 23.9 years for women; that’s the same as average life expectancy at 66 in 2020.
“If the government wanted to keep this more or less constant going forward and put its faith in the official projections, it might increase the state pension age to 68 by about 2036 – 12 years sooner than planned under current legislation.”
PwC believes that, on conservative projections, state pension age will continue to increase at a rate of one year every eight years. That means a 35-year-old today wouldn’t get state pension benefits until age 69 and state pension age would be 70 by 2050.
Source: PwC
Standard Life thinks it will rise slightly faster, by one year every seven years. That would mean it would reach 70 by 2047, 71 by 2054, 72 by 2060 and 73 by 2067.
| State pension age: |
When rise starts: |
Affecting people born after: |
State pension age guide for people aged between: |
| 66 |
2019 |
1953 |
51-58 |
| 67 |
2026 |
1960 |
44-51 |
| 68 |
2033 |
1967 |
37-44 |
| 69 |
2040 |
1974 |
30-37 |
| 70 |
2047 |
1981 |
23-30 |
| 71 |
2054 |
1988 |
16-23 |
| 72 |
2060 |
1995 |
9-16 |
| 73 |
2067 |
2002 |
up to 9 |
Source: Standard Life
John Lawson, head of pension policy at Standard Life, said: “State pension age looks like it’s developed its own seven-year itch.”
Plugging the gap
A 50-year-old affected by the rise in state pension age from 65 to 67 would have to start saving £80 a month from now until retirement to fill the missing two years of state pension,
PwC figures show. A 35-year-old would have to stash away £35 a month, without taking into account any increases in state pension age beyond 67. Wilson at PwC said: “This is no longer a far off scenario: plans need to be put in place now.”
With the move serving as another reminder that the government is putting the onus firmly on individuals to provide for their own retirement, planning ahead is vital.
Lawson said: “People who want to take control of their own retirement age need to start a savings plan so that they can draw their income when they want. “For example, someone aged 22 today would still be able to take £102 a week between age 65 and 71 if they saved just £23.50 a month from now on.
“The message is clear: if you want to control your retirement age, don’t rely on the state, make your own plans.”
The views expressed in this article are those of the author and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
Author: Jennifer Hill
Jennifer is an award-winning British financial journalist. She recently left The Sunday Times, where she was deputy Money editor, to set up her own company, mediahill Ltd. She is a previous personal finance correspondent of Reuters, the global news service, and personal finance editor of The Scotsman newspaper.
She has won or been shortlisted for six Headlinemoney awards, the ‘Oscars’ of personal finance journalism in the UK. She has also scooped or been nominated for accolades from the Association of Investment Companies, Ignis Asset Management, the Association of British Insurers and the British Insurance Brokers’ Association.