PensionsJul 20 2017

Advisers break state pension news to clients in their 40s

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Advisers break state pension news to clients in their 40s

On 19 July the government accepted the recommendation in the Cridland Review that the state pension age increase should be brought forward to 68 between 2037 and 2039.

Under the current law, the state pension age is due to increase to 68 between 2044 and 2046.

The hike in the state pension age announced in the House of Commons by secretary of state for work and pensions David Gauke, came the day after a report from Sir Michael Marmot, a former government adviser and now director of the Institute of Health Equity at University College London, which showed a century’s rise in life expectancy has almost stalled.

Steve Carlson, financial planner at Cardiff-based Carlson Wealth Management, said if the recent improvements in mortality rates continue to plateau, increasing the state pension age means the next generation of pensioners will be in receipt of a state pension for fewer years than those are currently reaching state pension age.

"Bringing forward that increase exacerbates the problem," he said.

"The current system is unaffordable and although a fairer method of balancing the books would be to drop the triple lock, that would be political suicide as the grey vote is far too important.”

For the under 40s who still wish to retire at 67, IFA Scott Gallacher of Leicester’s Rowley Turton  advises that they will “need to save around an extra £20 per month”.

"The decision knocks people's confidence in the state pension system with some believing that the state pension won't be there for them.

“While this should make them more self- reliant, in reality many just give up on pensions entirely as the cost is so huge," he said.

Mr Gallacher will be identifying all of his affected clients and contacting them shortly to ensure that they are fully aware of the change.

Referring to the campaign by some women born in the 1950s who are fighting changes to women's state pension age to bring it in line with men's, know as Women Against State Pension Inequality, he forecast: “It probably closes the door completely on the Waspi claims as it would be difficult to justify one group retiring at 68 funding another's group's retirement at 60."

He added: “Hopefully, the lessons of Waspi will be learnt in terms of letters to the affected people being a sensible precaution against future 'I didn't know' claims."

Tom Selby, senior policy analyst at A J Bell, said the government announcement emphasised the importance of taking responsibility for your own retirement.

"Whether we like it or not, the state can and will move the goalposts, so there is absolutely no guarantee of either how much you will get or when you will get it.

"For some an extra year in work might not be a problem - indeed many will relish the opportunity to keep active as they get older. But for others, particularly people in physically demanding jobs, this will be a bitter pill to swallow.

"The issue of intergenerational unfairness continues to rear its head and ultimately the baby boomer generation have once again had the best of it, benefiting from a lower state pension age and - for now at least - the triple-lock.

"The triple-lock in particular is an increasingly bizarre policy which provides a 2.5 per cent underpin to the state pension without any clear justification."

But Vince Smith-Hughes, a retirement income expert at Prudential, stressed it is not entirely a land of milk and honey for those approaching retirement.

“Prudential’s research has shown that  one in seven people retiring this year has made no provision for their retirement and will rely heavily on the state pension to provide an income when they stop working.

"The state pension will provide a third of the total average income of all people retiring this year."

Steve Webb, director of policy at Royal London and a former pension minister, warned advisers this is unlikely to be the last pension age increase that we see.

"Government has to review every five years so all planning around state pension ages must be regarded as provisional.  Assuming longevity continues to improve, pension ages will continue to rise but length of life in retirement will rise as well."

With the state pension age continually increasing, long-term pension planning is practically impossible, Steve Bee, a pensions expert, suggested advisers consider using fixed term annuities to bridge the period between an individual’s preferred retirement date and their state pension age.

Tom McPhail, head of policy at Hargreaves Lansdown, said for anyone yet to reach age 47, there is still time to adjust their retirement plans by looking to contribute more or look to change where they invest.

"We feel it is important the government meets them halfway; we need a national savings strategy to help people save and invest for their future. A good starting point would be for the government to look at a savings commission.”

Many are going to be concerned about whether the state pension could eventually be phased out altogether before those at the younger end are old enough to draw their pensions.

With this in mind,  Graham Peacock, managing director, Salvus Master Trust, said: “The industry will be looking closely at the finer details now, as such a change will necessitate a huge programme communication and engagement – this could amount to one of the biggest public information programmes seen since the Second World War."

He adds: "The last time a change to the state pension age of this magnitude was implemented – with the raising of the state pension age for women - those in charge of the country at the time failed miserably to get the message across to the stakeholders. There will be no room for error this time round – failure to deliver could see the trust in pensions irrevocably destroyed.”