New analysis suggests the state pension age should rise faster than planned in order to be intergenerationally fair and sustainable.
The State Pension Age may need to rise faster than planned to ensure fiscal sustainability, support intergenerational fairness and keep up with increases in life expectancy, according to the International Longevity Centre [ILC].
Last month, the Government announced plans for the next SPA review. The current plan is to increase SPA from age 66 to age 67 between 2026 and 2028, and to age 68 between 2044 and 2046. However, the last review in 2017 proposed bringing forward these plans so that state pension eligibility would go up to 68 between 2037 and 2039.
According to the ILC, any increase in the SPA could stop pension costs from inflating above the current over £100bn a year [a cost that has risen three-fold since 2000], but to varying levels depending on how it is calculated. Using life expectancy based on year of birth and the latest population projections, it has compared the timetabling and costs of four different methods of setting SPA between now and 2045: having the same number of years in retirement as previous generations, keeping the ratio of people in work to those at or above SPA constant, spending a third of adult life in retirement and linking SPA increases to improved life expectancy. The ILC says keeping the radio of people in work to those at or above SPA constant would deliver significantly faster rises in SPA than current plans, rising to age 68 by 2031, age 69 by 2034 and age 70 by 2040. “It would also help deliver significant savings after 2030, rising to around 16% by 2040,” says the ILC. The option of spending a third of adult life in retirement would deliver the slowest increases and would cost more than current government plans, especially between 2027 and 2033 when it would be 6% or 7% more expensive.
Professor Les Mayhew, Head of Global Research at ILC and Professor of Statistics at Bayes Business School, says: “Deciding state pension age is not a trivial matter. The decisions made in the latest review will impact on the incomes of everybody, whether that be via pension benefits or taxes.
“Frankly, we’re probably going to have to increase SPA further between 2030 and 2045 for it to be intergenerationally fair and fiscally sustainable. It’s not a question of ‘if’ but ‘when’ and ‘by how much’. The impact of Covid on life expectancy needs to be factored in, but the trends are fairly well set in stone.
“However, the Government will need to assure that any plans for increases do not unduly exacerbate existing income inequalities without some form of remediation. Those who are unable to work for health reasons may well need additional help.”
The analysis comes as a Work and Pensions Committee report, published this week, calls on the Government and regulators to play a greater role in supporting savers to make better decisions about their money, with pension freedoms at risk of being seen as a failure unless savers start receiving proper guidance.
Andrew Megson, Executive Chairman of My Pension Expert, said “MPs are right to address the lack of support for pension planners. However, I fear they are missing a trick by placing greater importance on guidance, as opposed to independent financial advice.
“Whilst guidance can be a useful tool, it is too generic and does not take into account an individual’s specific needs. What’s more, evidence suggests that Britons actually find more value in tailored, regulated financial advice – the problem is that they don’t know how to access it. Recent research from My Pension Expert found that almost half (47%) of Britons feel the Government should do more to improve access to independent financial advice – so surely it would be more beneficial for the Government to focus efforts on advice instead.
“Acknowledging the issue of pension engagement in the UK is a positive step. However, for meaningful change to occur, the Government must ensure that people have better access to independent financial advice, rather than vague and generic guidance. Only then, will we see improved retirement outcomes for Britons.”