March 24, 2011

UK: Pension age may increase to 77, warns expert

GLASGOW, Scotland / The Herald Scotland / News / March 24, 2011

By Simon Bain

Today’s 40-year-olds may not get their state pension until they are 71, while 17-year-olds might not be able to retire until they are 77, a pensions expert has warned.

John Lawson, head of pension policy at Standard Life, made his forecasts after yesterday’s Budget and said those figures would apply if life expectancy continued to rise at the present rate.

Mr Lawson’s predictions were the result of the “new automatic mechanism” for raising the state pension age outlined by Chancellor George Osborne.

Photo by Christopher Furlong / Getty Images

Standard Life said that by 2041 the state pension age could have risen by another five years on top of the one-year increase to 66 due to take effect by 2020.

“Younger people may have to wait until they are 75 or more before they can retire,” said Mr Lawson. “By 2071, assuming the same rate of mortality improvement continues, the state pension age will have risen to 77.”

"Assuming the same rate of mortality improvement continues, the state pension age will have risen to 77"

Joanne Segars, chief executive at the National Association of Pension Funds, said the automatic linking of the state pension age to rising longevity was sensible, but warned: “Any new mechanism needs to handle future increases more fairly than the rise to 66 already proposed.

“For 330,000 women in their late-50s, retirement age was already rising by as much as two years with little time to plan.”

Andrew Gaches, of Glasgow-based pensions consultant Hymans Robertson, warned that a rising state pension age would only cut the costs of the welfare system as people remained in work.

He added: “Second, increasing state pension age at the same rate for all disadvantages those most reliant on it – the poorest who have shorter life expectancies.”

One solution would be to tier state pension age by career average earnings, he said.

Mr Osborne also signalled his acceptance of the radical plan, first revealed last year by Pensions Minister Steve Webb, to introduce a single-tier state pension “based on contributions, at a flat rate, so people know what to expect”.

He said: “The current estimate is it would be worth £140 a week. It will not apply to current pensioners and will take years to come into effect.”

The Government wants to curtail as far as possible the means-tested pension credit system, developed by Gordon Brown when he was Chancellor, which can result in lower earners getting no benefit from having private savings.

Ms Segars said: “More than half a million new pensioners a year will get a simpler and more generous state pension, and reliance on means-tested benefits will be slashed. For too long we have put up with one of the most complicated and meanest state pensions in Europe.”

Helen White, of the Association of British Insurers, said the flat-rate pension would “help people plan for their retirement, stop people falling into the means-testing trap, and ensure it always pays to save”.

Mr Osborne said the Government had accepted the recommendations of the Hutton Report, published a fortnight ago, as a basis for consultation on public-sector pensions and insisted there should be “no cherry picking on either side”.

Lord Hutton, the former Labour minister, recommended linking pensions to career average not final salaries, and raising public services retirement ages to the state pension age.

Mr Osborne said he certainly intended to overhaul the “discount rate” basis of costing public-sector schemes, which had resulted in contribution levels being set far too low.

“A more appropriate discount rate would ... increase employee contributions by an average 3%,” he said, adding the real shortfall was wider.

He said Parliament should also consider similar changes to the pensions of MPs.

Ms Segars welcomed the Government’s acceptance of the report, but said: “Public-sector workers are facing uncertainty about jobs and pay, and a significant increase in contributions could spur many to quit their pensions.”

©Copyright 2011 Herald & Times Group.