Business

State pension 'is still in intensive care'

It might be wise to check if your pension is in intensive care
It might be wise to check if your pension is in intensive care It might be wise to check if your pension is in intensive care

Anyone listening to the Chancellor Philip Hammond in last week’s Autumn Statement might have had the impression that he hasn’t touched our pensions.

However, he’s sneaking around in the background and continuing his predecessor’s work on a major review of state pension provision, and I’m here to tell you what’s going on right now.

A wise man once said that there is nothing more noble than good deeds done in private. Well, these last few governments are doing plenty to the pensions sector behind the scenes - but not all of these deeds are good.

Here is a striking fact that is emerging from the government’s ongoing process of pensions review. Did you know that people who retired in the past decade are expected to spend a third of their life receiving the state pension?

We know this, because number-crunchers in the government actuary’s department have just been tasked with looking at projected life expectancy in future years, as part of the state pension age review.

The pensions minister Damian Green, assisted by under-secretary Richard Harrington, has asked the actuaries to consider two scenarios based on adult life starting at 20.

The first scenario, as mentioned above, is based on people receiving the state pension for 33.3 per cent of their adult life, which is the experience of those reaching state pension age over the past 10 years.

The second scenario is based on people receiving the state pension for 32 per cent of their adult life, which has been the reality for those reaching state pension age over the past 20 years.

Richard Harrington pointed out that people are living and working longer than ever before, which is why it is important for the government to get the age review right, “to ensure the system stays fair and sustainable for generations to come.”

However in last Wednesday’s Autumn Statement the Chancellor strongly hinted that the writing may now be on the wall for certain departmental budgets.

From what we know of current government thinking, this is likely to include a review of the pension triple lock, which helps to ‘inflation-proof’ our state pension, and shore up its spending power.

This first review of the state pension age will report back by May 2017.

The state pension is, of course, just one strand of retirement income and, particularly with the roll-out of auto-enrolment of all eligible workers into a workplace pension, at least two sources of retirement income may become the norm in future.

However, as regular readers of this column will know, the huge cost of the state pension and our increasing longevity make it very difficult to predict how much it will be and how it will look in 20 or 30 years.

The problem is that while average life expectancy a century ago was 60, today it is 81.This means that all kinds of complex problems are anticipated in future, due to the so-called ‘dependency ratio’.

The same actuaries are telling us that that by 2050 the dependency ratio - the number of workers paying into the state pension system, compared to the number of retired people drawing on it - is set to change from 3:1 to 1:1.

It’s not rocket science: there are three workers paying for each state pension today, but in 34 years that is predicted to drop to one.

In order to make those contributions stretch a little further, it is already known we will have to wait longer, before we can draw our state pension. In fact, the state pension age is currently set to reach 68 for both men and women by 2046.

This may mean increased reliance on workplace and private pensions. However, in this regard, women are particularly vulnerable to saving less than would be regarded as adequate.

This is down to three factors: taking a career break to care for children, being more likely to be in a part-time job, and the general tendency that is still with us for men to have a higher salary than female colleagues. (This is something we will be looking at in greater detail next week.)

In fact, this year 47 per cent of 20-something women, and 51 per cent of 30-something women are caring for children.

The tendency for women to be disadvantaged in pension saving is so universal that it’s even got a fancy name: the ‘Motherhood penalty’.

Given the ongoing evolution and possible curtailment of the state pension, it may not be a good idea to assume it will be such a substantial element of your income, when you retire.

Particularly for women, it has never been more essential to consider beefing up your workplace or personal pension, as a ‘safety net’ to offset what the pension age review will come up with next May, and what successive governments may come up with in the future.

And that’s what the Chancellor didn’t tell you, in last Wednesday’s Autumn Statement.

:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005