Savers approaching retirement will be given the “opportunity” to top-up their state pension through voluntary additional National Insurance contributions, chancellor George Osborne announced during his Autumn Statement today (5 December).
From October 2015 a new class of voluntary national insurance contributions, known as Class 3A, will be introduced. These voluntary NI contribution give those who reach state pension age before 6 April 2016 an opportunity to boost their additional state pension.
Those a long way from retirement, however, saw the pension pushed farther away, as Mr Osborne confirmed speculation that millions will have to wait longer so that state pension “keeps tracks with life expectancy”, with some predicting children born today will not retire until they are 77.
The date when the state pension age increases to 68 will be brought forward to the mid-2030s - it had not been due to kick in until 2046 - and the age will then increase to 69 by the late 2040s.
As a result, people in their forties will not get a state pension until they are 68, while those in their thirties will have to wait until they are 69. A link to life expectancy is also expected to mean rises will continue into the future, to eventually well beyond age 70.
Ed Wilson, director in Pricewaterhouse Cooper’s pension team, said: “Linking the state pension age to life expectancy means we could easily see people having to wait many more years before they get their state pension.
“The chancellor announced someone in their 40s won’t get their state pension until they are aged 68; the linkage to life expectancy is likely to mean someone starting work now will have to wait to age 72, and a child born today is unlikely to receive their state pension until they reach 77.
“Individuals face the increasingly stark challenge of making sure they have a sufficient amount put away for their retirement.”
Richard Parkin, head of retirement at Fidelity, said: “Just because the state pension age is changing, it doesn’t mean we are all condemned to work until we are 70.
“If you still want to retire at 65, you need to engage in sensible retirement planning – look at the income you need and when. Getting your state pension later means you have to fund the gap from when you retire to state pension age.
“For someone aged 40 today wanting to retire at 65, it would mean saving an extra £50 per month in real terms to compensate for not getting the state pension until age 68.
“While conventional annuity products don’t easily accommodate this, it can be managed through simplified pension drawdown.”
The changes to the state pension came as the chancellor announced there would be a cap on total government welfare spending from next year, but that this would not include state pension despite this being by far the single largest welfare spending item.
The limit on total welfare spending would be set by the chancellor at the beginning of each parliament, and MPs would be asked to support it.
Mr Osborne said he was “proud” have been part of a government that introduced the current ‘triple-lock’ for pension increases - which is due to end at the end of this parliament - and that a further increase in the state pension of £2.95 a week would be introduced from April 2014.