Retirement: are pensions going to be much smaller in future?
Recent news headlines have not been supportive of pensioners. An end to the ‘triple lock’, a rise in the state pension age, and an OECD report advocating denying the wealthy any state pension at all. In the face of this assault we look at the options that savers have to provide for their retirement.
Increasing life expectancy has seen the number of years in which people spend in retirement creep ever upwards. Using census data, the Office for National Statistics calculated that in 1981 a 65 year old man could expect to live another 13 years (17 for a woman). By 2011 this had increased by five years to 18 years of retirement (21 for a woman).
By 2050, more than 50,000 Britons are expected to reach 100, and it is now predicted that a child born today has a one-in-three chance of living to 100 years old. This is a sobering statistic for those saving for retirement, where rising life expectancy raises the likelihood of your savings running out before you die. It has also put the future affordability of the UK state pension under question.
To alleviate some of this pressure, in late March an independent review commissioned by the government, the Cridland Report, recommended that the retirement age rise from 67 to 68 by 2039, a full seven years ahead of schedule. A second report by the Governments Actuary’s Department (GAD) presented a scenario in which millennials - those currently under 30 - would only have access to the state pension when they hit 70 years old.
End of the pension triple lock?
More recently, Prime Minister Theresa May has reportedly refused to commit to the Conservatives retaining the ‘triple lock’ on pensions in their general election manifesto. This policy increases the basic state pension by the highest of three indicators: average earnings growth, consumer price inflation, or 2.5%. Understandably popular with voting pensioners, it has seen their incomes increase well above those of working families who have struggled to grow their earnings ahead of inflation in recent years.
Pouring fuel on the fire, this week the OECD came out with a report that suggested that the UK end state pension payments to the wealthiest 5% to 10%, to allow the government to give more support to people in greater need. This would be somewhat controversial, as pensions are theoretically financed by National Insurance contributions, meaning that those people that do not contribute, or contribute less than required, receive lower pensions.
Whether these headlines will come to pass is open to debate, but it seems inevitable that the state pension age must rise further to protect the system. Between 2026 and 2028 it will rise to 67, with further increases likely shortly after.
What can you do to protect yourself in retirement?
In recent years the British government has gradually reduced the ceiling for pension pots down to £1 million (rising in line with the Consumer Price Index thereafter), with onerous tax charges for those pots that exceed the limit. Unusually where they have taken with one hand, they have given with the other by increasing the ISA limit to £20,000.
From the government’s perspective, this enables the Treasury to receive tax receipts up-front as contributions into ISAs are net of income tax, while reducing the ability of savers in pensions (where payments are gross of tax) to defer tax paid until after retirement.
Changes to the allowance have made saving into an ISA - where there are no upper size limits - more important than ever. A couple saving £40,000 a year between them should be able to amass a considerable amount of wealth over time, with all the income and capital gains tax free. If the government ever did follow the OECD’s suggestion, and limit pensions for high earners, having sizeable savings in an ISA could potentially help sidestep future changes to the rules.