Industry veteran HENRY TAPPER gives his verdict
Henry Tapper is a retirement industry veteran, chairman of pension research firm AgeWage and president of Pensions Mutual.
The Pensions Minister Torsten Bell is hinting that he will drop one of the elements of the triple lock, potentially reducing future pension increases.
Meanwhile, he also hints he won’t support the most drastic proposed increases in the state pension age.
If the Government is constrained financially and needs to choose, then I’m not hinting – I am going to say it outright.
It is fairer to freeze state pension ages than to continue triple-locked state pension increases.
Henry Tapper: Not everyone is as lucky as me, and people in less affluent parts of the country have seen their life expectancy fall
Under the triple lock, the state pension increases every year by the highest of inflation, average earnings growth or 2.5 per cent, and the Government has promised to stick to this for the rest of the current parliament.
The state pension age is going to start rising from next month from 66 to 67, in a gradual process that will take place over the next two years.
The timing of the next rise to 68 is officially up for review again, and after that what happens is unknown.
But the Institute for Fiscal Studies and other think tanks and experts are warning that without reform of the state pension triple lock, the retirement age will have to go up faster.
The IFS says to 74 by 2069, affecting people now in their 30s and younger, but others think the age jump and rate of increase might need to be even more radical.
What matters most to Brits about the state pension – the age they get it or the annual increase?
The state pension age matters most to those yet to get it, like me. The rate the state pension increases matters more to my 93-year-old Mum.
I worked most of my life expecting to receive my state pension when I’d be 65. I’d be a pensioner in eight months’ time had that conjecture held true.
But my state pension age increased to 66 and then a 2020 review raised it to 67 so I have two years to wait.
I can put up with it. I’m still working and can balance not being a pensioner against having probably another 25 years to live.
I live in a posh place. But not everyone is as lucky as me, and people in less affluent parts of the country have seen their life expectancy fall over the past few years.
Why should I expect the same pension when I’ll receive it for a longer period and have had the chance to save all my life into personal and company pensions? This opportunity has meant I’m doing well.
Shouldn’t what the state pays out be based on people’s means and how adequate their pension is? Should I have the same state pension age as someone my age in a less well-off part of the UK?
These are the kind of questions the pension expert Baroness Jeannie Drake has to consider as she conducts the first part of the Government-sponsored Pensions Commission study into adequacy of income in later life.
If we followed Australia, we would have a means-tested state pension which would only be paid to those with little or no income in later life, but this would complicate things still further.
The chart below shows how many state pension ages those in their 50s and 60s MIGHT have had under the various independent reviews Governments have asked experts to conduct in recent years – try means-testing that!
The Government is required by law to review the state pension age every six years, so it has ordered two more reports which will look at when to introduce an increase to 68. How much more complicated could this chart become?
Freezing state pension age versus keeping triple lock
Older people understand the value of state pension increases but I’m not sure those just reaching retirement do.
It is amazing that four out of five people swapping their pension pot for an annuity as they retire don’t include any increase with the lifetime income they buy.
Though we seem obsessed by the rate of increase of our state pension, we are still four times as likely to buy a pension with no increase in payment than one linked to a formula for increasing!
This brings me to the Pensions Minister’s dilemma. Does the state pension age matter more than future increases? (That’s my phrasing of the questions he discussed in a recent debate in parliament.)
I think that people’s attitude towards pensions in general but the state pension in particular is based on immediate need.
Annuities, like the state pension, are judged by the income they pay at the outset. People engage with the payment today, not increases far in the future.
However, the most important thing to most people regarding the state pension is when it comes into payment.
You just need to think about the Waspi campaign, which was launched due to the delays women suffered when their expectation of a state pension age was 60, and is still ongoing.
The lesson the Government should learn from that is to keep people informed of why state pension changes are happening and manage expectations.
As far as increases to state pension payments go, I suspect that people lock in to the current rate of state pension – the full rate rises to £241.30 a week next month – and imagine it as what they will get.
Increases are a bonus because people expect pensions (like annuities) to be level. They like the certainty of the state pension.
Of course there are exceptions. My Mum, now a pensioner for nearly 34 years, is very interested in pension increases.
But pensioners, despite being good at voting, are not as productive to the Government as we workers.
If we must choose, it is fairer to freeze the state pension age than to keep the triple lock.
The most defensible position is to preserve the triple lock as a poverty-protection measure, while continuing a gradual rise in state pension age and considering reforms to tax thresholds.
That avoids forcing today’s pensioners to absorb all of the adjustment, while also stopping the system from becoming unaffordable as its costs fall more heavily on a lower proportion of workers and future taxpayers to pensioners.
But health in retirement is an issue you can’t ignore.
In the UK, the average healthy life expectancy (HLE) is significantly lower than the state pension age of 66–67. While state pension age is rising to 67 by 2028, HLE — the average years spent in “good” health — has fallen to roughly 61 for both men and women, creating a gap of several years in poorer health before retirement.
Extending the working age for many simply won’t work.
A more holistic approach needs to address earlier the otherwise emerging health issues in later life.
A further consideration is provision of care which currently costs around £200 a day and lasts for 2-6 years
The reason most choose a flat annuity is because they know they will receive an increasing state pension and like the higher starting amount of a flat income while they are younger and more active. The power of pension source integration.