Increasing the state pension age and introducing a mid-life MOT won’t solve the UK’s pension crisis, as this month’s RP Inquiry found.
An increase in the state pension age is likely to lead to people’s retirement prospects worsening as their health declines, advisers have warned.
This month’s Inquiry asked readers for their thoughts on the Cridland review, which recommended increasing the state pension age to 68 by 2039, ending the triple lock and introducing a “mid-life MOT”.
The increase in the state pension age is not a surprise given the steady rise in longevity. But it means people will have to either work longer or ensure they have saved sufficient funds to cover their needs if they want to retire at an earlier age. As it stands, pension saving in the UK is not generally high enough to allow for an earlier retirement.
RP asked readers whether the increase in the state pension age would improve or worsen people’s retirement prospects. Almost half of readers (48%) said worsen, 15% said improve, 35% said neither and 2% were unsure (see chart 1, below).
Of those who said worsen, one reader said the increase would mean a lot of people won’t even make it to retirement.
Another stated: “In general, the population is not funding towards their retirement so if they are totally reliant on the state pension, they will either have to work longer, if their employer permits this, or starve.”
Health issues
Working longer may not be possible for some individuals. Health problems in older age can have a big effect on someone’s ability to work and the higher state pension age will cause more people to be affected by this issue. This is particularly a problem for manual workers.
One reader pointed out: “The increase in the state pension age will result in people whose body will not allow any extension of their working lives falling on other state benefits to see them through – a false economy on the part of the government.”
Another argued it would be better to pay out a lower state pension amount at a younger age, which would motivate higher contributions to personal pensions, rather than relying on the state pension at a later age.
Conversely, an adviser who thought the increase would improve people’s retirement prospects said people would have longer to save for a personal pension and not depend on the state.
Although most readers thought retirement prospects will worsen, more than half (58%) said the increase in the state pension age was fair on the younger generation. Meanwhile, 34% thought it was unfair and 8% were unsure (see chart 2, below).
Most readers who thought the increase was fair cited the rise in longevity. One said: “It makes sense to align the growth in state pension age with the average life expectancy. Otherwise, we are only increasing the tax burden.”
Another argued that young people need to start to understand that the state pension cannot sustain them and start making some provision by contributing to a personal pension.
Of those who said the increase was unfair, one argued that it is an easy “win” for the government, adding: “Although life expectancy has been increasing it is stalling and to expect all individuals to have a productive working life of 50-plus years is foolhardy.”
One reader suggested the whole system needs to be made more sophisticated to account for geographic, demographic and medical impacts, arguing: “If small enhanced retirement companies can manage this why can’t the government?”
Triple lock
The Cridland review recommended ending the pensions triple lock in the next parliament. RP asked readers if this was the right way forward – 61% said yes, 33% said no and 6% were unsure (see chart 3, below).
Of those who said yes, one reader said the triple lock is overly attractive to the older generations while costing the younger generations. Another agreed, saying: “It is too expensive and unfair on the younger generation.”
But a reader who answered no argued the triple lock is a benefit that has been paid for and has been an expectation: “Pensions should be protected to ensure that pensioners are able to keep their value. Politicians keep meddling, which has only reduced the effectiveness of UK pensions.”
Another recommendation put forward by the Cridland review is introducing a mid-life MOT.
It will prompt people to take a step back halfway through life to consider their health, later-life career prospects and whether they are managing their finances in line with their future aspirations. Some have suggested it could act as a gateway to point people to professional financial advice.
RP asked advisers if the MOT will help to avoid a later-life crisis. Less than half (46%) said yes, 37% said no and 17% were unsure (see chart 4, below).
Of those who said yes, one reader stated: “This will help people take more responsibility for their own financial future sooner.”
Others liked the idea, but raised questions over how it will be funded and whether it will encourage people to take action. “A mid-life MOT which doesn’t promote action will be useless,” one reader said.
One of the readers who answered no argued that many people have stretched budgets with limited scope to improve their retirement savings.
Another said a mid-life MOT is too late: “The real critical issue that the government has not been willing to tackle since the effective demise of occupational final salary pension provision is the amount of defined contributions required from both employers and employees to provide a reasonable standard of living in retirement.”
Many readers pointed out that the people who need the MOT most probably will not bother, while the ones who will make use of it are probably already considering their finances in later life.
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