Elaine Turtle rounds up the key points of the Cridland review of the state pension age and what they mean for both the UK population and the cause of long-term saving.
The Government recently commissioned John Cridland, a former Director General of the Confederation of British Industry, to review the state pension age and look at the financial implication of people living longer.
Under current legislation, from December 2018 the state pension age for men and women will increase to 66. It will then rise to 67 between 2026 and 2028 and to 68 between 2044 and 2046.
In his report, Cridland recommended those rises should be brought forward so the state pension age for age 68 comes into play between 2037 and 2039 – seven years earlier than current legislation has in place.
The other key recommendations in Cridland’s report were:
* The state pension should not increase by more than one year in a 10-year period;
* People should have access to a mid-life ‘MOT’ to help them plan;
* More flexibility in universal credit for those nearing the state pension age;
* Anyone deferring their state pension to receive a lump sum once they start taking it, with the flexibility to drawdown that lump sum in stages if they are over the state pension age;
* Scrap the ‘triple lock’ – which increases the state pension by the greater of 2.5% a year, inflation or average earnings – and cut forecast spending on the state pension to 5.9% from 6.7% of GDP by 2066;
* Couples saving into an ‘auto-enrolled’ pension to have a joint pot of money to protect them if one is out of work; and
* Communicate changes to the state pension clearly.
Research has shown people now expect to spend a third of their life in retirement and, although the Office for National Statistics currently predicts life expectancy will increase, it will slow down and the healthy life expectancy figures have remained roughly stable.
As we all know, we are facing a large increase in a pensioner population with a smaller working population going forward, which puts immense pressure on health and social care. This is also a fast-growing cost to the Exchequer, and funding needs to be found from somewhere – or less needs to be paid out.
Going forward, more individuals should have some form of private pension due to auto-enrolment and Cridland’s report says the gap between the richest and poorest pensioners will reduce a little over the generations, but an inequality will remain.
The report also acknowledges carers and people with ill-health or disabilities will find it more difficult to continue to work up to the state pension age and therefore will have lower private pension savings and may not be able to cope with the proposed changes to not receiving their pension until later. It also admits the self-employed, black, Asian and other minority ethnic people and women will also struggle with the proposed changes.
Time to prepare and implement
Cridland feels people need at least 10 years to prepare for any changes to the state pension age and also that any changes should be limited to just once every decade. This is a sensible approach and also enables everyone, including the pension providers, to have time to implement the changes needed – something that is often not considered.
He has also recommended everyone has the ability to have a mid-life ‘MOT’, which should help them plan for retirement. For older workers, he has suggested universal credit should be made more flexible to allow part-time working together with the state pension, allowing partial drawdown, and has suggested long-term carers and people with disabilities or health issues should be able to access their pension a year earlier. Mind you, I am not sure how much a year earlier will help those people.
Cridland also recommends it is the government’s duty to inform people of the increases to state pension age. There is the current issue of women in their 50s not having been told directly of when their pension is now going to be paid, as many were surprised to find out when they could now get their pension.
He recommends scrapping the ‘triple lock’ on pensions but this is unlikely to be dealt with by the current Parliament. If the triple lock is retained then, by 2060, 1% of GDP will be spent on pensions.
The report has also suggested couples be given the option to combine their private pension savings into a ‘joint’ pot to help mitigate the disadvantages that are caused by one partner taking time out of working in order, for example, to look after children. This is based on a Swiss model and is certainly an interesting option, although what happens in the sad event of a divorce could become even more complex.
All in all, then, it looks as if anyone aged 25 today will not retire and receive the state pension until they reach the age of 70. While this means they will need to take control of their own retirement plans, it may also have a knock-on effect of turning people away from saving and, once again, does not help the cause of long-term saving.
Elaine Turtle is a director of DP Pensions
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