Steven Cameron, Pensions Director at Aegon UK, comments on the independent Third State Pension age review, whose call for evidence closes today (24 October).
“The third independent review into the State Pension age is exploring how changes in life expectancy, along with other factors should be reflected in future changes to the State Pension age. The State Pension Age is increasing to 67 by 2028, with a further increase to 68 pencilled in for the early 2040s.
“Alongside private and workplace pensions, millions of people rely on the State Pension as the bedrock for their retirement income. But this very valuable benefit comes at a high cost, covered on a ‘pay as you go basis’ from taxes and National Insurance of today’s workers.
“The overall State Pension costs depend on how many years people receive it for. When life expectancy is improving, there’s always pressure to increase the State Pension Age. But the other key factor is the yearly amount, which is currently increased each year in line with the Triple Lock. Life expectancy is one, but not the only factor, to take into account.
“The Government instructed the review to assume the Triple Lock will continue indefinitely. This will add pressure to increase the State Pension age further and faster, despite it needing to be reformed at some point to stop state pensions eventually catching up with average earnings. We’ve urged the review team to look at different scenarios here.
“An increase in life expectancy across the population can hide many disparities between groups based on individuals’ health. It’s also recognised that average life expectancy varies hugely between different parts of the country, reflecting different socio-economic conditions and opportunities. Those with the lowest life expectancies suffer most from an increase in State Pension Age – having to wait an extra year is a bigger loss if you have say 5 years to live, compared to someone with 30 years ahead.
“The review also explores whether the UK should follow some other countries and introduce an ‘Automatic Adjustment Mechanism’ for State Pension age. This would take decisions away from politicians. But in the UK, this needs to be treated with caution. The Triple Lock automatically adjusts the State Pension amount, so a further mechanism that automatically adjusted the State Pension age would leave future governments with very little means of controlling future costs.
“The age at which you can draw your State Pension has a huge impact on individual retirement plans, even for those with substantial private or workplace pensions. We believe people should be given at least 12 years’ notice before any increases, so they can plan ahead. We also believe that if the State Pension age increases further, people should be given the option to take it a little early, subject to a reduction in yearly amount to make it financially fair.”
