I was lucky to see my Grandparents live to the age of 85 & 95. Living 25-30 years beyond the retirement age of 65 meant drawing on the state pension seemed like remarkably good value, and indeed it was. Their existence was a happy and simple one. They were not motivated by money but by the happiness that family brought them. The generation they were from seems vastly different to modern society which has its own unique pressures and demands. One such demand is making sufficient provisions for retirement and this has just got a little bit harder.
Starting from October 2020, the State Pension Age (SPA) in the UK is now 66 for both male and females. This is the beginning of an upward trend with the retirement age set to move to 67 by April 2028 and to 68 between 2044 and 2046 (although this may be brought forward). Private pensions currently allow access at age 55 but from 2028 this will be raised to age 57, thereby maintaining the 10-year difference between the minimum pension age and the SPA.
What does this trend mean?
The government is moving the SPA upwards due to the fact we are living for longer. In the UK today, a male can expect on average to live to 79.9 years and a female to 83.6 years (source: ONS, 2019). There are of course regional variations with the population in more affluent areas living longer than those in less affluent areas.
The purpose of the upward trend in State Pension Age is essentially a cost driven exercise by the government. Raising the SPA by one year will reduce net government spending by about £3bn a year (source: IFS). This seems a relatively small saving given that £116bn was spent on State Pensions in 2019 alone (UK Public Spending Data). This equates to approximately 5% of GDP.
Historical Context
It is inevitable that people will have to work longer before they can access the State Pension. When the ‘Old Age Pension’ was introduced in 1908 (effective 1
st January 1909) by the Asquith government, the retirement age was set at 70. However, life expectancy was only 51 for men and 58 for women meaning very few became eligible for it. What we are seeing now is a return to the original retirement date set over a 100 years ago.
The very first Old Age Pension paid 10-25p per week which is the equivalent of £12-£30 in today’s money. The State Pension today pays £175.20 a week (if contributed 35 years of NICS) which is the equivalent of £9,110.4. If this is a person’s sole source of income, then it is within the current tax allowance of £12,500 and so no tax will be paid on it.
The Question to Ask
The question that people must ask themselves is whether this is enough money to live on. Many people dream of retirement involving travelling to far flung corners of the globe in search of white sandy beaches. The reality for many will be quite different.
A quick analysis of how far the full monthly state pension of £758.62 will go:
- Housing: A privately rented one bedroom flat in London will cost you anywhere from c. £800 per month to over £2,000 per month depending on post-code. This equates to £9,600-£24,000 p.a. If the state pension is your only source of income you can forget about renting privately in London during retirement. According to Statista, the average weekly rent for social renters in England was £102 per week (18/19). This equates to £441.66 pcm.
- Food: The average monthly spend on food per person is £166.80 per month
- Utilities: The average monthly spend on gas, electricity, broadband and water is £56, £58, £30, and £34.58, respectively. Combined, this equates to £178.58 per month
You do not have to be a genius to see that the state pension will only cover the basic cost of living each month. If you have been able to pay off your mortgage, then you may have a bit spare from your state pension, but it will not be much.
‘FREE’ Money from the Government
The reality is that to avoid poverty in retirement we must be making savings elsewhere. A private pension provides
valuable tax reliefs on contributions. This is done to incentivise people to save more. For example, if you contribute £2,880 p.a. to a pension, the government will top this up with £720 thus making a total of £3,600. This is equivalent to basic rate tax relief of 20% For higher and additional rate taxpayers the relief is even more. This is literally free money from the government.
WHY would you not take this?! The impact of compounding returns will be that much greater on your pension the earlier you start to save.
Future generations will have to make greater provisions for themselves. Do not rely on the government to provide you with a comfortable retirement. The government will give you money towards a private pension so why wouldn’t you take this? (
https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief)
We discuss this and more in our upcoming
webinars. In the meantime, your views, thoughts, shares, and likes are most welcome!
