Retirement age heading to 68 years

23 Mar 2017

The state pension age is likely to rise to 68 years of age by 2037 as early indications from the Cridland report show that the long-term affordability of the state-funded pension will be put under increasing pressure due to greater life expectancy, reports Sara White

The affordability of the state pension in the long-term is exacerbated by changing demographics. Life expectancy for men born in 2016 is 90.6 years and for women 93.5 years and healthy life expectancy, while a significant issue, appears to be keeping track with rises in overall life expectancy. Next year will see the final year when people can get the state pension at 65. By 2028, state pension age will have reached 67.

The review, headed by John Cridland, the state pension age independent reviewer, considered different options for what retirement might look like beyond 2028, taking into account changes in life expectancy and wider changes in society. The main finding is that the state pension age will have to increase again within 20 years.

It is also likely that the pension triple lock will be removed, guaranteed only to the end of the current parliament in 2020. The triple lock means that state pension rises by the higher of inflation, earnings or 2.5%.

In order to maintain affordability, the report recommends ‘that the triple lock is withdrawn in the next parliament. Under our recommended timetable, state pension spending would be 6.7% of GDP in 2066/67, which is a reduction of 0.3% compared to the principal OBR projection. If the triple lock is withdrawn, spending will be further reduced to 5.9% of GDP by 2066/67’.

Cridland makes a number of recommendations including:

state pension age should rise to 68 between 2037 and 2039;
state pension age should not increase more than one year in any 10-year period, assuming that there are no exceptional changes to the data used;
that all employers should have elder care policies in place which set out a basic care offer; and
that people should be able to access a mid-life career MOT and review which should be facilitated by employers and by the government using online support and through the National Careers Service.

Physically demanding jobs

One of the concerns about the increase in the state retirement pension age is the physical challenge of certain professions, which would put workers under immense pressure to stay in work, citing the physical, mental and/ or emotional demands of a range of professions, including teaching, manual occupations and healthcare.

The report ratherly oddly describes this issue as ‘burnout’, suggesting that a mid-life career review, organised and provided by employers, could be an option for affected groups.

Although many respondents agreed that ‘burnout’ is an issue, there was no real appetite for an occupation-specific state pension age. Trade unions representing specific (generally public sector) occupations noted the specific concerns of their members, but the proposed solution was generally delinking their occupational scheme Normal Retirement Age from State Pension age rather than an occupation-specific State Pension age.

What to expect

Under 2016/17 rates, the full new state pension will provide an income of £155.65 per week. In steady state this will be after 35 National Insurance qualifying years whether these are comprised of contributions or credits or, as is often the case, a combination of both. A transitional element will be in place for some years to ensure that the old system of NICs are recognised.

Respondents to the initial consultation flagged concerns over changes to the current pension state age which would adversely impact women and the self-employed, who may have contributed less in NICs and contributory payments. Respondents generally agreed on the importance of credits for assuring women’s state pension position.

Others questioned whether there should be a review of occupational pension schemes to bring them in line with the older pension age, although most felt that the government could not intervene to make changes to private pension schemes.

For example, the Pensions and Lifetime Savings Association provided survey findings showing that 31% of their members thought that a variable state pension age would have a major impact on their scheme.

Savings strategy

David Fairs, pensions partner, KPMG UK said: ‘There is a real challenge in the UK with life expectancy being markedly different across different groups of the population. For some, working into later life will be deeply satisfying but for others who have challenging or physical jobs, working to almost 70 will be utterly unrealistic.

‘As state retirement appears to be retreating into the distance there is an increasing need for individuals to save for later life so that they have options around when they retire.

‘The government urgently needs to define a retirement and savings strategy that enables people later in life to have real choices around when and how they want to transition to retirement. At the moment, we have a complex and confused picture with products like pensions and Lifetime ISA competing for hard earned savings and we have an increasingly large section of the workforce in the gig economy who are excluded from pension savings because they fall outside the catchment of auto enrolment.’

The report stated that there has been no modelling for the impact of Brexit on the long-term pension world.

In terms of comparative nations, Denmark and Netherlands have already raised their state pension age to 68 from 2031, and 67 and three months from 2022 respectively.

The current life expectancy in the UK is close to the OECD average, while other developed economies, such as France, Italy, Spain, Australia and Iceland, have already achieved a higher life expectancy than the UK.

By the time Generation Y are approaching retirement nearing 2050, there will be 357 pensioners for every thousand people of working age, compared with 305 pensions per 1000 workers currently.d.