The election campaign has thrown the focus firmly back on state pensions and what we can hope, or expect, to receive in our later years. The state pension is the core of retirement income and it is crucial people understand how much they will receive and when it will be paid.
The triple lock – which increases income each year by the highest of inflation, earnings and 2.5 per cent – is top of the agenda.
The recently published independent Cridland Review suggested removing the triple lock from 2020 onwards and replacing it with a link to earnings.
However, the political parties needing to keep older voters on their side may see that recommendation ignored, or at least sweetened to some degree.
Cridland also endorsed accelerating increases in the state pension age. The 2014 Pensions Act legally bound the Government to bring forward its recommendations on this by 7 May but it has chosen to defer any announcement given the forthcoming election.
Given there are few votes to be won by telling people they will be older before they receive their state pension, this is not a huge surprise. But it does demonstrate just how much long-term pension policy is at the mercy of short-term political developments.
There have been umpteen changes to state pensions over the last 20 or 30 years, which is one of the reasons why most people would struggle to work out how much they will receive.
The new single tier structure, brought in for those reaching state pension age after April 2016, was billed as a solution to that. And it may well be in 20 or 30 years’ time – if no further changes are made during that period.
For those retiring any time soon, though, there is a complex calculation involved. This looks at the amount payable under the old system, compares that with benefits calculated as if the single tier had always been in place and uses the higher of the two.
Given the complexity, it is great to see an online portal being provided by the Government to show people how much state pension they have built up so far and an estimate of what they will receive at retirement. This is much better than people relying on the misnomer it will be the maximum flat-rate amount.
That said, our research shows more than 60 per cent of people approaching retirement have not sought such a forecast and many do not even know it exists, which is disappointing. It is clear that much more work is needed to raise awareness of the tools available to help people adequately plan for their retirement.
Another significant issue that appears to have been glossed over is the death benefits available as part of the new state pension. Before 2016, people could receive a state pension based on their deceased partner’s National Insurance record.
However, the new state pension works on a single life basis, providing a benefit based solely on their own NI record (although there are limited situations where people may be able to inherit a small amount of pension from their partner).
This makes it all the more vital for people to find out what they are entitled to and consider whether it makes sense to top-up their pension by making voluntary NI contributions.
State pensions face an ongoing challenge as a pay-as-you-go system funded by the working population that needs to cope with significant increases in average life expectancy.
Hopefully we will get a proper debate on the future of the state pension as we move further towards the election. Whatever party wins will have to deal with this key challenge sooner rather than later.
Andrew Tully is pensions technical director at Retirement Advantage