State pension age increase - what it means for you

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."

How we spend our pensions
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How we spend our pensions

Figures from Saga show that the over 50s now account for the majority of money spent by Brits on travel and tourism. They have the time to spare, the money, and they are healthy enough to take on the world.

A poll from Abta found that in the wake of pension freedoms, 35% of people were considering cashing in at least part of their pension to travel. A separate study by Senior Railcard found that pensioners take an average of three holidays a year, plus two weekends away, and 17 day trips.

Research from Senior Railcard found that retirees eat out an average of three times a month. However, one in ten do so more than twice a week, and one in three people said that one of the first things they did when they retired was to go out for lunch with their friends.

Of course, just because retirees want to enjoy themselves, it doesn't mean they are happy to throw money away. The vast majority are keen to eat at lunchtimes, when a fixed lunch menu tends to be cheaper, and canny retirees are skilled at tracking down pensioner special offers too.

Figures from the Office for National Statistics show that on average nearly a fifth of the money spent by people aged 65-74 is on leisure. This includes everything from the cinema and theatre to golfing and gardening. They spent more on this than on food, energy bills and transport.

A report by Canada Life found that retirees are spending £4,279 a year on having fun - that’s more than £1,000 more than they spend on boring essentials, and is a 74% increase over the past ten years. It went on to predict that this trend was set to continue, and that pension freedoms would encourage people to spoil themselves a bit more in retirement

Pensioner property wealth is now over £850 billion, and all these family homes don’t look after themselves. The Senior Railcard survey put home renovations in the top 20 activities people got stuck into on retirement, and figures from ABTA found that almost a third of people who were considering raiding their pension pots under the new pension freedoms planned to spend the cash on their home. This seems like an eminently sensible investment - looking after what is undoubtedly their most valuable asset.

Unsurprisingly, while some pensioners are very well off indeed, others are struggling with debt. Figures from Key Retirement found that the average retiree has £34,000 of debt.

Most of this is mortgage borrowing - in many cases driven up by the number of people who unwittingly signed up to an interest-only mortgage. However, credit cards, overdrafts, and loans are also common. It’s why so many pensioners have used pension freedoms to access enough cash to pay their debts.

The day to day basics are swallowing up their fair share of pensioner cash too. On average, people aged 65-74 spend a third of their weekly income on essentials like food and bills - which is hardly living the high life.
The bank of gran and grandad has become an increasingly vital source of cash for families. According to Key Retirement, of those who release equity from their property, 21% of them use the cash to treat their children and grandchildren. This includes an average of £33,350 to help children get onto the property ladder, £6,000 to buy them a new car, £11,000 on family weddings, and £24,780 giving grandchildren a helping hand.

While retirees are quite rightly spending what they need to enjoy retirement, they are hardly all throwing caution to the wind, buying flash cars and spending the kids' inheritance.

Most expect to have something left over to pass onto their family after their death. Some 69% expect to leave property in their wills, and 75% expect to leave cash - according to - because while baby boomers know how to have fun - they also know how to save for the future.


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