Pension costs in the Treasury have been growing rapidly due to increasing life expectancy, with some pensioners receiving more in retirement than they spent paying National Insurance as workers. To counter this, the last Labour government set out plans, based on recommendations from Lord Turner, to steadily increase the state pension age (SPA) to 68 for both men and women over the next four decades.
This will see the state pension age (SPA) rising from 65 to 66 by October 2020 and to 67 by 2028. However, this must remain affordable in line with the Government’s intention that “an individual should receive the state pension for the last third of their adult life”.
The Government tasked Sir John Cridland to judge the “best balance for a fair and sustainable State Pension age beyond 2028” and he recently published his Independent Review of the State Pension Age: “Smoothing the Transition”.
Before his report, future increases were not currently anticipated being required before 2046, but Sir John advises that the SPA may have to rise to 68 earlier than planned if it is to remain affordable. His recommendation is that it should increase to 68 between 2037 and 2039. The Government Actuary Department (GAD) had earlier concluded that the SPA would have to rise to 69 between 2053 and 2055, to remain sustainable.
What we do know is that 2018 is the final year when people will be able to get the State Pension at 65, and it is interesting to note that life expectancy at that age is over 20 years on average, of which half is likely to be spent in good health. A baby girl born in 2017 can expect to live to be 94 years and a boy to be 91. Compare this to a man who retired in 1908 at age seventy, when life expectancy was nine years for the one in four who reached that age.
Those lucky enough to get the state pension will on average spend almost a third of their adult life in retirement, a proportion which has never been attained before now. This stage of our lives is being termed the “third age” and change is already happening. People are retiring at different ages, both before and after the State Pension age, either because they need to or they want to.
The challenge to us as a nation is how we finance the SPA. The state pension needs to reflect the fact that we are living longer to be sustainable. This means it needs to start later and to increase less quickly. People need to plan for the SPA by saving more – especially those who tend to be less well-pensioned, such as the self-employed and those who have had time out of the workplace to care for others. There is also the more general challenge of increasing automation, meaning we need to find new ways to keep people employed for longer.
Under the Pensions Act, the government is required to carry out a review of the SPA every five years to ensure the system remains financially sustainable. It has, however, ruled out further changes to the SPA before 2028, and has committed to providing 10 years’ notice of future changes to ensure fairness for those nearing retirement age.
Sir John reports that we have three factors to contend with:
- a growing population
- an ageing population (as the Baby Boomers retire), and
- an unprecedented increase in life expectancy.
Although he supports the continuation of a SPA for all, he suggests that some of the money saved by the government by increasing the SPA should be “re-invested” in the system, in order that disadvantaged groups can be better supported.
In his report, he recommended that “means-tested” access to some pension income should be provided to “a defined group of people who are unable to work through iill-health or because of caring responsibilities”, one year before they reach SPA. This should be introduced by the time the SPA increases to 68. Modifications should also be made to Universal Credit for those approaching SPA at the same time to “enable a smoother transition into retirement”.
He also feels that the government could do more to support those approaching SPA who have caring responsibilities. He recommended that employers implement ‘eldercare policies’ including a basic care offer; while the government should consider ‘statutory carers’ leave’, based on the existing sick pay model, to enable informal carers to provide emergency care.
He writes that those in work should also be able to access a service in middle age that would encourage them to “take stock, and make realistic choices about work, health and retirement”. This proposed ‘mid-life MOT’ would be provided by employers and the government through a combination of online support and access to the National Careers Service, he said.
It is understood that the government will now consider Sir John’s recommendations alongside the findings of the GAD report.
As far as employment is concerned there is no set retirement age and employees have the right to continue working beyond their state pension age. If you have any queries in this area, please do not hesitate to speak to your HR Consultancy team.