State pension age hikes: Retirement affordability advice needed

10 Feb 2023

Baroness Neville-Rolfe was appointed last year to prepare an independent report making recommendations to the government on what metrics should be considered when setting the state pension age in the future.

The call for evidence on this topic, which closed at the end of last April, gathered a great deal of information which is written up in the Department for Work and Pensions' (DWP) ‘Second State Pension Age Review' report.

Final conclusions and recommendations from all this work are due to be published over the next couple of months. The report's grasp of the demographic changes happening across the UK population is impressive.

Abandon triple lock or increase pension age?

The UK population is getting older and simultaneously we are living longer, that much nearly all of us understand. However, the numbers are stark. Over the next 25 years to 2047, we are going to see a 24% increase in the number of Brits who are over the age of 65. Today, 12.1 million have reached that milestone and in 2047 there will be 15.1 million of us over 65. Perhaps more scarily from an NHS perspective, the number of people aged 85 or over will nearly double over the same time frame to reach 3.3 million.

Indeed, more than a third of the entire working-age population of the UK will be pensioners by 2047. The result of all this ageing is that the burden of triple locked state pension provision on HM Treasury is rising pretty fast. State pension and other benefits paying out to UK pensioners already amount to 4.8% of the UK's GDP and that percentage is set to rise to 6.2% of UK GDP by 2049/50.

The government has two options to contain this growing cash call: it can abandon the generous triple lock or increase the state pension age by more than it is set to increase by today, or both. Right now, if you are born between 1961 and 1977 (broadly the UK's Generation Xers), you will not be able to access your state pension until age 67. If you were born after April 1978, you are already going to have to wait another year to age 68.

It seems certain that as longevity continues to rise, albeit at a slower rate on recent estimates, state pension age will be ratcheted up a little higher than is currently in plan to keep the increasing pressures on the public purse in check.

This leads us to the natural conclusion that many more of us will need to be working deeper into old age. However, during the pandemic the DWP report notes that rates of unemployment and inactivity amongst the 50 to 64-year-olds actually increased, and in September to November 2021 were at their highest since early 2017.

Economically inactive

Indeed, the problem of economically inactive over 50-year-olds is so bad that Mel Stride, the work and pensions secretary, is leading a review into how to entice retired 50 to 64-year-olds to return to work.

He will report back before the end of February 2023 with recommendations which could include tax incentives and the expansion of so-called ‘mid-life MOTs'. There are 308,000 economically inactive people in this pre-state pension age group, up from 37,000 just three years ago according to the Office of National Statistics. From the government's perspective, this has been one of the more undesirable effects of the pandemic.

The average retirement age currently sits at age 65.1 for men and 64 for women in 2021. Are too many people retiring too early, especially as more and more of them are dependent on defined contribution (DC) rather than the more generous defined benefit (DB) schemes? Those reliant on DC pensions may have noticed that some stock market sectors have experienced severe falls as world economies adjust to new circumstances.

Therefore, will managing a potentially increasing gap between the age we leave the workforce and the age we are able to receive our first state pension payment become the single largest issue in financial advice in the coming years?

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