In an ideal world everybody would be building up and saving for their retirement – a period in many cases that could end up being 30% of an individual’s life.
The introduction of workplace pensions with an element of compulsion, (certainly on the part of employers to pay into employees’ pension plans), has certainly helped to start the process of improving an individual’s retirement position.
It does however need to be said that for the foreseeable future I think that the State Pension will for many people form the bedrock of their retirement income.
Consequently, it is really important that people know when they can access it and how much they are likely to get.
The State Pension system has undergone quite a few changes – some quite significant and controversial over the past 10-12 years. I think that there are likely to be more changes in the future as the Government tries to control the cost to the public purse of increasing life expectancy on pension costs.
One controversial measure that was introduced by Government was the change for the qualifying age for women to access their State Pension. This was moved far more quickly from age 60 in 2010 to equalise with men at age 65 in 2018.
A further increase in the State Pension age to age 66 for both men and women has also come into place after October 2020.
Future rises of the State Pension ages to age 67 from 2028 have already been legislated for. At the same time, the minimum age for accessing other (private) pensions will increase to age 57 from the current age of 55.
The Government are already looking at a further rise in the State Pension age to 68 and whilst this is due to be phased in between 2044 and 2046, I believe that the fragility of the economy and the public purse may result in these changes being brought forward earlier.
The difficulty the Government will have is to communicate these changes to the public because this type of news is not going to be well received. The Government got itself into quite a scrape when it introduced changes to transition of the equalisation of State Pensions for men and women, which affected those women born in the 1950’s.
The full State Pension is currently £175.20p per week for those who retired after April 2016. The cost of providing this type of income was recently assessed by Aegon, (a major provider of pensions in the UK), as £336,000 if pension funds were used to purchase an annuity to provide this level of income.
For most people the State Pension will not on its own provide sufficient income or lifestyle function and these sort of numbers and figures are I think sobering and remind us all of the need to plan ahead and think about the type of retirement we want.
In 2010 the Coalition Government introduced the State Pension Triple Lock which guaranteed that the State Pension is guaranteed to increase by the higher of:
- Average Earnings
- 2.5% per annum
With the current level of government borrowing increasing as a consequence of Covid-19 there are questions about whether this is sustainable in the future, (despite it being a Conservative Party manifesto pledge in 2019 before the last General Election).
The State Pension is the biggest and largest single item of welfare spending in the UK accounting for 42% of all 2018 spending – with the cost in 2016-2017 being £92 billion per annum, (source OBR).
It would not be unrealistic to think that we can expect further changes to how and when we receive this important benefit.
Article written by Ray McHugh - Lonsdale Wealth Management independent financial adviser working in our Barnet, North London financial planning team.