I listened in this week to a conversation that could have taken place any time in the last three years, and undoubtedly will be repeated many times over the next few years.
“Jean reaches 60 next month, but has just realised she has to keep working because her pension age has gone up.”
Female state pension age is currently around 61½, and will be over 63 by the time Jean catches up with it.
There is one consolation for her though: with the introduction of a single state pension now brought forward to 2016, she will be one of the first to benefit from it.
Jean is an administrator with a small charity, and her state pension will form the bulk of her retirement income. Increasing the SPA makes the difference for her between retiring and continuing to work.
And she is by no means alone. The Institute for Fiscal Studies has found that employment rates for women aged 60 went up by 7.3 percentage points when SPA was increased to 61. Interestingly, employment of their male partners rose by 4.2 percentage points as well.
The IFS attributes the rise partly to a ‘shock’, where people like Jean realise at the last minute that they cannot afford to retire, and partly to a ‘signal’, where people see SPA as the natural time to stop working.
Of course, women are as capable as men of working into their early 60s, and the unfortunate thing (from a male viewpoint, at least) is not their need to keep going but that many do not know about it in advance.
Whether we will see the same pattern of increasing employment when SPA rises to 68 and beyond is uncertain. Scottish Widows research found that half of those in their early 30s would be angry if they were still working at 65, but they will not be eligible for state pensions until at least 68.
Most adviser clients are not wholly dependent on state pensions, but they could be significant in planning for a comfortable retirement. So bridging a possible gap between stopping work and receiving state pension could be very important.
This could be through cashing in non-pension investments or creative use of drawdown, for example.
However, advisers should also encourage clients to consider the ‘signal’ of increasing SPA. If they remain fit and able to work, keeping going can greatly improve their standard of living when they do stop work.
For example, deferring benefits from 63 to 68, and achieving a real return of 2 per cent a year net of charges, would increase maximum drawdown income by over a quarter in real terms at current interest rates.
Contributing more to a pension, whether from earnings or by recycling drawdown income, would make the increase higher. And leaving pension invested provides a tax-free lump sum on death and offers the possibility of an enhanced annuity if health deteriorates.
Not everyone will want, or be able, to work to the higher state pension ages, but keeping going can lead to a much more comfortable retirement.
It should at least be part of the discussion of how to cope with increasing SPA. And do make sure that none of your clients are in any doubt about what their SPA is, or that a future government could change it.
Ian Naismith is head of pensions market development at Scottish Widows