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The only way is up for the state pension age

The age at which people retire is going to become an ever more pressing issue in the next few years as people come to terms with the fact that the state pension age is no longer set in stone at 65. In fact, women approaching pension age have had to get used to a moving target for several years as their state pension age is already in the process of moving from 60 to 65.

The latest Pensions Bill was introduced to Parliament last month and the Government hopes it will become law in early 2014. It should see the Government’s timetable for the state pension age for both men and women increase from 65 to 66 by 2020 and then to 67 between 2026 and 2028. The Government’s current plans then see the state pension age increase to 68 by 2046.

Perhaps the most significant measure included in the bill is the Government’s plan to then link the state pension age to life expectancy automatically.

The Government’s argument for this is on the grounds of fairness. If people are living longer, the cost of providing state pensions increases substantially and thosebenefiting from increasing longevity are being asked to contribute to the costs.

The Department for Work and Pensions is currently the largest single government department in terms of expenditure and the state pension is the single biggest area of spending for the DWP, accounting for £74.2bn in 2012.

The attraction of limiting this cost is considerable at a time when all areas of government expenditure are under scrutiny.

Research from PwC predicts that increasing the state pension age to 70 rather than 68 by 2046 would result in annual savings worth 0.6 per cent of GDP, while the National Institute for Economic and Social Research says every year of increase to the state pension age could save £13bn, or 1 per cent of GDP.

A recent report from the International Longevity Centre UK predicted that the cost of age-related spending will increase by 5 per cent of GDP between 2016 and 2062 at the current rate of growth, with the cost of the state pension alone amounting to 1.9 per cent of GDP.

Faced with figures like this it is little surprise the Government is keen to limit any increase in pension costs.

When the pensions bill was published last month, the Government announced the introduction of a five-yearly review to ensure that the state pension age was keeping up with increases in life expectancy. Pensions minister Steve Webb said the automatic system would “establish a framework for considering future changes in light of increasing life expectancy to maintain the long-term sustainability of the system”.

Last week, Labour also appeared to signal its intention to use an increase in the state pension age to reduce pension costs if it was to win the next general election.

For many people this will raise problems for their retirement planning.

Survey after survey shows that many people intend to retire early but when their level of retirement savings are examined, they continually fall short of their target.

The latest figures from the Scottish Widows pensions report suggests the average intended retirement age is now 66, with an expected level of income of £25,000 a year.

As most people are actually saving a fraction of this, the date the state pension age kicks in becomes an important factor in being able to generate a sustainable level of retirement income.

Between 1960 and 2012, average life expectancy increased by 10 years for men and eight years for women, while the state pension age remained unchanged for men and is only now in the process of being equalised at age 65 for women.

The current programme of state pension age increases will add a further three years to retirement dates but this does not offset even half of the increase in pension costs seen over the past 50 years.

If life expectancy continues to increase, it is inevitable that retirement ages will start to creep up, particularly as people become more aware of the potential shortfalls in their own retirement provision.

Research from Aviva predicts that if life expectancy continues to increase at its current rate and if state pension age is automatically increased at this rate, state pension age will increase to 70 for anyone currently aged between 37 and 40, will be 75 for those aged 17 to 20 and will be 80 for anyone currently under four years old.

Predicted increases to state pension ages. Source: Aviva
Age today State pension age (assuming life expectancy increases at the same pace as it has since 2000)

60 and over

65 (or lower for some women retiring before 2018)

53 to 59

66

49 to 52

67

45 to 48

68

41 to 44

69

37 to 40

70

33 to 36

71

29 to 32

72

25 to 28

73

21 to 24

74

17 to 20

75

13 to 16

76

9 to 12

77

5 to 8

78

1 to 4

79

Under a year old

80

This creates some opportunities for advisers to educate current employees about the importance of taking responsibility for their own retirement and not having to rely on the state.

A report from BlackRock published last week suggests that many people would have taken a much more aggressive approach to their investments for retirement if they had properly understood how much money they would need to save to provide for their own retirement.

The BlackRock research shows that 40 per cent of people would have started pension saving earlier, 25 per cent would have invested more aggressively and 30 per cent would have worked longer if they had properly understood in advance how much income they would receive in retirement.

BlackRock head of retail for EMEA Alex Hoctor-Duncan says: “Increased life expectancy, the slow extinction of generous pension arrangements, state privations and low yields from traditional ‘safe haven’ assets are just the beginning of the challenges facing investors. They will also need to adopt a more outcome-oriented approach and accept that achieving their financial goals may involve taking some risk.

“Fund managers and advisers can help this key group of investors understand that doing nothing now risks depleting their capital later and that they need to overcome the disconnect between what they want, how they intend to get there, and overcome the fear of the need to change in this new world of investing.”

Axa Wealth head of retirement planning Andy Zanelli says: “The move to increase the state retirement age to 67 between 2026 and 2028, with future five-yearly reviews, is an exercise that will save the country up to £100bn in the coming decades. 

“It is hard to see the downside of this change from an economic point of view and it brings the state retirement age into a more modern context when considered alongside increasing longevity.”

Zanelli concludes: “Again there are benefits for financial planners as these changes will force people to review their existing financial plans and highlight a need to fund any gaps created if a set retirement age had been in mind.”

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