The 2019 ISA season is now in full swing, and it's as good a time as any to focus on financial planning - and, within that, looking ahead to your retirement years to ensure financial security.
Assessing the increase to the state pension age
Much was made of the announcement last week that a state pension age increase to 68 would be phased in between 2037 and 2039 – seven years earlier than planned. Those affected are taxpayers aged 39 to 47, meaning the policy change will affect between 6-7 million people.
David Gauke, the work and pensions secretary, announced the controversial plans claiming that they would ensure “fairness across the generations, and the certainty which people need to plan for old age”. However, against the backdrop of a separate report that life expectancies in the UK have begun to stagnate, the proposals attracted significant levels of outcry.
The first thing to note is that this was not a call made by Government on a whim, and was in fact the recommendation of former CBI director general John Cridland, who published an independent review in March focused on state pension age arrangements after 2028. Although there was no obligation on the part of the Conservatives to accept these recommendations, it is difficult to make the argument that the decision was an unfounded one.
That, of course, boils largely down to sustainability, and the ability of the workforce to perpetually fund the state pension of an ageing population. It may not provide much consolation for 39 to 47-year olds, but it is worth taking a look at the stimuli for increasing the state pension age ahead of schedule.
History of the state pension age and life expectancies
When it was first introduced as the ‘Old Age Pension’ on the 1st of January 1909, the qualifying age was set at 70. This was then eased to 65 in 1925, although as a result of many men having to wait until their wives reached the age of 65 in order to receive the married couple’s rate of pension, the pension age for women was cut to 60 in 1940.
This status quo remained until 1995, when pressures from Europe to equalise the state pension age saw the Conservatives lay out plans to increase it for women to 65 between 2010 and 2020. In 2007, the Labour Government then passed a new law to raise the state pension age to 66 between 2024 and 2026; then to 67 between 2034 and 2036, and to 68 between 2044 and 2046.
Compounded by last week’s announcement, it is clear that this rate of change has picked up considerably in recent times after decades of inertia. The problem is that it is dwarfed by increases in life expectancy over the last century, and, by extension, the costs of sustaining the state pension.
In 1909, the average life expectancy for men and women was a mere 48. In 2015, however, average life expectancy in Britain was 80 for men and 83 for women, according to the Office for National Statistics. By 2030, these figures are forecast to reach 82.5 and 85.2 years for men and women respectively.
As the table below shows, this has resulted in a shift in age demographics, with over 65s set to make up 24.6 per cent of the UK population by 2045 – an increase of more than 10 per cent from 1975. Not only that, but those of so-called working age will comprise 6.3 per cent less of the population than in 1985.
0 to 15 years (%)
16 to 64 years (%)
65 years and over (%)
Source: Office for National Statistics
Also, in 1985, spending on the state pension commanded a 3.7 per cent share of GDP in the UK – a figure which tailed off to 3.3 per cent in 1990. However, in the five years following the 2008 financial crisis, spending increased by over 1 per cent of GDP, as did the value of the basic state pension (a rise of 28 per cent). As such, around 4.7 per cent of GDP is now committed to state pensions, and, even with the announcement last week, this figure is set to climb to 6.1 per cent by 2045/46.
The counter argument
Clearly, the numbers confirm that state pension costs are spiralling, which not only vindicates the Conservatives, but suggests that more needs to be done to make this part of our welfare expenditure sustainable. Yet it isn’t all about facts and figures. Critics point out that life expectancy and ‘healthy life expectancy’ are two very different things, with the latter diminishing in recent times, and levels of ill health for those in their early 60s beginning to surge.
Furthermore, there are clear disparities in healthy life expectancy across income groups, regions and even professions in the UK. For example, pensions champion Ros Altmann observed that those who work in manual labour for the duration of their careers are not expected to live as long. Additionally, she points out that National insurance amounts to over 25% of salary for most people, yet there will be some who get little or no pension from this. As such, she suggests that a better, fairer way to balance the books would be to introduce greater flexibility with the way in which the state pension is paid, so as to accommodate those who are in the greatest need, and/or those unfairly prejudiced.
Against a backdrop of a stubborn budget deficit, and soaring national debt, the state pension will invariably become a target as Britain looks to live within its means. Certainly, expenditure towards it cannot simply be left to escalate indefinitely. Yet any cuts, or fiscally conservative reforms, need to be done in a fair manner, such that those who have paid into the pot their whole working lives are not let down when it is their turn to reap the fruits of their labour. How to strike this delicate balance? That is a path for our well-paid politicians and experts to navigate.
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