State pension age increase - what it means for you

Blow for retirement plans, as government announces state pension age will rise faster


State pension age rise

The government has announced that the State Pension age will rise to 68, seven years earlier than planned. The Secretary of State for Work and Pensions, David Gauke, said he was accepting the recommendations of the Cridland Report, by accelerating the rise in the state pension age. But is this rise fair? And is it the last?

See also: How to save over £1 million by retirement -- starting at age 45

See also: Your questions about workplace pensions answered

The State Pension age was already on the rise. Women's pension age is currently rising to 65 by 2018. At that point, the current timetable shows a rise from 65-66 for both men and women by 2020. There will then be a pause, before it increases to 67 between 2026 and 2028. As a result of the latest announcement, it will then rise to 68 between 2037 and 2039.

What it means for you

The announcement will affect the 5.8 million people aged between 39 and 47, who will now get their state pension a year later than expected. More specifically, it will hit those born between 6 April 1970 and 5 April 1978. The move is expected to save the government £74 billion by 2045/46.

It will also affect public sector pensions. UNISON general secretary Dave Prentis said: "This will be another bitter blow for public sector workers who's workplace retirement is also linked to the state pension. They will have to work an extra year to pick up their state pension, while the retirement age for their workplace pension will also be increased."

Even for private sector workers, there's a chance it will affect your workplace pension. Calum Cooper, Partner at Hymans Robertson, warns: "Many defined benefit open schemes now have retirement ages linked to the State Pension age to manage longevity risk."

Is this fair?

The experts aren't surprised. Patrick Connolly, Certified Financial Planner with Chase de Vere, points out that: "State pensions are being put under severe pressure as an ageing population means there will be more people claiming it and comparatively less people paying taxes to meet these claims. At the same time, increasing longevity will mean higher government costs in other areas such as healthcare and social services. For the State Pension to remain viable either the State Pension age will need to continue rising in line with life expectancy increases, State Pension benefits need to be cut or the State Pension becomes a means-tested benefit which isn't universally available. None of these are particularly attractive options."

Cooper says what we are seeing is the State Pension catching up with enormous rises in life expectancy over the years. He argues that: "The Government's decision to bring this forward by seven years should be welcomed, particularly in the context of fairness to future generations. Despite recent slowdowns, life expectancy has risen considerably and at a pace higher than previous legislation allowed for."

Some commentators argue that the move isn't fair. Jamie Smith-Thompson, managing director of pension advice specialist, Portafina, says he has a great deal of sympathy for those affected by the change. He says: "They have probably been paying National Insurance contributions for a number of years, only to find they need to work longer for a benefit that was promised at an earlier age. It would be illegal to change the same type of rules in a final salary pension. The fact that the government is constantly changing the rules seems very unjust."

There is particular concern about what this means for those who are less likely to live so long - including those on lower wages. Cooper points out that rises in average life expectancy mask the fact that it is rising far faster for the affluent, while it has stalled for those who are struggling. TUC General Secretary Frances O'Grady agrees: "In large parts of the country, the state pension age will be higher than healthy life expectancy. And low-paid workers at risk of insecurity in their working lives will now face greater insecurity in old age too."

The timing of the announcement was particularly unfortunate, as it came hot on the heels of a report suggesting increases in life expectancy were starting to grind to a halt. University College London expert Sir Michael Marmot crunched the figures and said that the rate of increase in life expectancy had nearly halved since 2010 in England.

More to come

While we reel from the latest changes, it's also worth bearing in mind that those who are younger can expect even more of this sort of thing, because the government has established the general principle that we should spend around a third of our lives in retirement. While increases in life expectancy have slowed, we are still living longer each year, and as life expectancy grows, the state pension will move later and later in life.

Alistair Wilson, Head of Retail Platform Strategy at Zurich UK, says: "The scope for state support is diminishing and it's highly likely that there will be further rises in the state pension age."

David Newman, Head of Pensions at Close Brothers Asset Management, adds: "For young people in particular, who may be looking at working into their seventies, putting aside as much as they can reasonably afford each month, and benefiting from employer contributions will make all the difference."

For all of us, this underlines the importance of planning for our own retirement. Connolly says: "The message is very clear. We are likely to live for longer and so if we want to enjoy the benefits of an extended life, and not be reliant on the State pension, we need to plan ahead. This means saving for the future to ensure that we are able to retire on our own terms and to live the life we want as we get older."

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