Whether they like it or not, many in the industry can see where the Government is coming from in bringing forward the state pension age increase to 68 seven years earlier than planned.
Increased life expectancy needs to be managed alongside the economics of having to fund the state pension, particularly if the alternatives, such as means testing or increasing taxation, are unpalatable.
But adopting the proposal in John Cridland’s review to accelerate the state pension age increase from 2044-2046 to 2037-2039 means less certainty around the age at which future generations can take it.
What impact will the move have on clients’ retirement plans? And what does that mean for the advisers helping them?
Communicating the uncertainty
Older clients close to retiring will be unaffected by the changes, as will wealthy people who do not rely on the state pension. However, advisers with younger clients or those building relationships with the children of their current clients will need to communicate the new era of uncertainty that faces them.
As Royal London director of policy Steve Webb points out, anyone more than 10 years away from pension age needs to be aware their state pension age is no longer fixed.
“Particularly when advising younger clients, advisers need to communicate the fact future state pension ages are highly uncertain and can change even well through someone’s working life,” he says.
“It is also worth remembering that, despite the rhetoric about people being forced to ‘work until they drop’, retirements will also get longer in this new environment. This means pension pots available to us at pension age will have to last longer than before.”
Bridging over troubled waters
Many believe further state pension age increases or changes to the current timetable for rises are likely as the Government grapples with the issues of demographics and economics. For Webb, those currently in their late 40s and early 50s cannot be certain they will maintain a state pension age of 68.
Aviva head of financial research John Lawson expects the state pension age to be even higher for younger clients, with those in their 20s and 30s potentially looking at ages of 70 and above.
Lawson recognises the state pension age is an emotive issue for many but believes a “hard-headed” approach is needed. For advisers, this means helping clients’ retirement income last as long as they do and getting people to understand that, if they want to retire before their state pension age, they need other sources of income to make up the shortfall.
One solution he suggests is using short-term income to provide a bridging pension until clients get their state pension.
“It’s about providing a mix of lifetime and short-term income,” he says. “Bridging pensions aren’t new – defined benefit schemes have bridging pensions to pay an income until the state pension kicks in, but they are available in the defined contribution world as well.”
Lawson also points out advisers need to take into account longevity expectations throughout retirement, not just at the point of retirement. “People might get an extra three or four years,” he says.
Given state pension income is factored in to cashflow modelling forecasts, Progeny Wealth director Alex Shaw expects clients affected by the changes to draw more heavily from flexi-access drawdown, particularly in the first five years of retirement.
He points out the bigger the value of the pension pot, the less significant the state pension becomes. However, younger people and low earners who will be more reliant on the state pension need encouragement to save as much for retirement as they can as early as they can. That said, he realises the cost of living for a young millennial is high.
He says: “Some can’t afford to do the bare minimum for auto-enrolment and have other calls on their funds such as rent, council tax and going out. We try and get people just to do something; not to wait a year as that will turn into five, then 10. But you can wave all the numbers you like in front of people and some just can’t afford it. This stuff isn’t going to get any easier.”
Tools of the trade
Selectapension national accounts director Peter Bradshaw says while 20 years seems a long time to plan for the state pension age increase, it is also long enough for successive governments to change pension legislation, which only adds to the uncertainty.
Bradshaw says advisers should ensure clients are aware that continuing to work until the increased state pension age may not be possible due to physical or mental health conditions. He also thinks care costs should be part of the broad discussion around retirement.
He says: “People need to take ownership of their retirement and advisers concentrating on people in their 40s should look at engaging and educating their clients and managing their expectations.
“If advisers don’t want to engage wholesale with younger age groups, they can direct them to online tools. There are plenty of tools out there that enable people to play with budget planners so they can see how much cash they will need in retirement.”
Jamie Smith-Thompson, managing director, Portafina
The change in the retirement age is one of the reasons we are tending to see people consider a phased retirement rather than planning for a set age to do so. With the dual problem of an unpredictability in retirement age and the possible onset of inflation, advisers need to be able to put forward schemes which will offer the greatest amount of flexibility.
The vast majority of people in the UK use the state pension to underpin their retirement income. They may have an element of personal pensions within their retirement savings, but the state pension is likely to be the major slice. Unless they have a healthy personal pension they are likely to be delaying their retirement until the state pension kicks in.
People who have private savings will have more flexibility – especially with drawdown. They can retire perhaps at 60 and reduce the income from that plan when the state pension is paid. However, as the pension age increases, that interim period increases and so greater pressure is placed on the part of the pension pot left invested.
Martin Bamford, managing director, Informed Choice
We will usually ask clients to request a state pension forecast so we can include these figures within their retirement income projection. The younger a client is, the less certainty we have around these numbers. For clients in their 30s or 40s, we include plenty of warnings and disclaimers around the probability of receiving the projected level of state pension income or starting to receive it from a specific date. All forecasts should be regularly reviewed, with the plan adjusted to take account of changes.
With rising life expectancy and continued austerity, we expect the state pension age to continue to be pushed back later, especially for younger people. There’s a question of intergenerational fairness which needs to be addressed; whether younger people should pay higher taxes today to fund the pensions for older people, or experience later and lower state pensions themselves. Each change to state pension ages should motivate people to make more personal provision for later life and place less reliance on the state.