Delayed at the office

"Will you still need me, will you still feed me, when I’m 64?" It seemed so old, 64, when Paul McCartney first sang that song on Sergeant Pepper’s Lonely Hearts Club Band in 1967. But now 64 is young. A man of that age can expect another 20 years of life and a woman another 23, and half the people who reach 64 will live longer than that. The big question we all face is who will feed us in our lengthening retirement?

Sir Howard Davies, chairman of the Financial Services Authority, says we will all have to work longer "We've moved very quickly from a period in which people typically started work at 16 to 18 and carried on to 65 and then perhaps lived another 6 [or so] years beyond that, so 45, 48 years of work was paying for 6 to 10 years of retirement, to a period where many people don't start working until their early 20's, and lots of them retire in their early 50's. So 30 years of work is then paying for another 20 years, 25, 30 years of retirement. The arithmetic just does not add up. You cannot save enough during 30 years of work to pay for 30 years of retirement unless you're saving half your income. So somehow we have to find a way of encouraging people to work longer in order to make more provision for their own retirement."

Nearly a decade ago, almost unnoticed, the Conservative Government decided to begin this process. Since 1948 women have reach pension age five years earlier than men, at the age of 60. But under a law passed in 1995, that will change. Most of the teenage girls who danced to the new Sergeant Pepper’s album in June 1967 will get their state pension later than 60. A woman born on 6 April 1950 would expect to claim her pension on 6 April 2010. But under the new law her pension age will be delayed a month to 6 May. Over the next ten years, women born month by month after April 1950 will have their pension age extended by a month until anyone born on 6 April 1955 or later will have to wait until they are 65 to draw their pension. A girl who was 12 just a few weeks before Sgt Pepper was released on 1 June 1967 will reach pension age on 6 April 2020 aged 65, the same age as the 12-year-old boys she probably avoided like the plague. Table 1 has the details.

It may not end there. There is now serious consideration being given to extending the pension age by another five years for everyone. That change could be tacked on the end of extending pension age for women, so men and women aged 42 to 47 now, born between April 1955 and April 1960, who currently expect to reach pension age at 65 will find that age increased step by step to 70. And by 2030 that would be the norm.

That second stage may not happen. But if it does there would be one big advantage. The money that people at work pay in National Insurance contributions could be used more effectively. At the moment after a full working life people get a pension of £75.50 a week plus some earnings-related SERPS or State Second Pension. That is usually not enough to live on. So people who have no other income get it topped up through a complicated means-tested benefit, to nearly £100, through the ‘minimum income guarantee’ which two million claim. By next October nearly five million pensioners will be eligible for some means-tested top up to their pension through the new pension credit. But the National Association of Pension Funds (NAPF) has recently recommended a major simplification. Instead of paying three pensions – basic, SERPS, and means-tested – it suggests just one Citizen’s Pension paid to everyone regardless of other income or contributions. That would save the large amounts of money currently spent on the bureaucracy of means-testing and checking National Insurance records and means the new pension could be £100 a week at no extra cost. In addition it would rise each year in line with earnings instead of prices and the extra cost of that would be paid for by raising state pension age from 65 to 70 by the year 2030.

The scheme has been carefully costed by the Government Actuary and the NAPF believes it would not only simplify the present system but would solve two other major problems. First, the means-tested element of the pension is not claimed by up to three quarters of a million people over 60 who are entitled to it – and the problem will be worse with the new Pension Credit. Under the NAPF plans, the Citizen’s Pension would go automatically to everyone at 65, so take-up would not be a problem. Second, by providing a decent basic pension that was given regardless of your income – a firm floor which can be built on – it would encourage people to save for their own retirement. At the moment unless you can save up for a pension that will be significantly more than the means-tested top up there is little point in bothering.

Lengthening life also affects private pensions. If you contribute to a stakeholder or personal pension you can start to draw your pension at any age from 50 to 75 (if you started it before July 1988 it is called a retirement annuity contract or a s.226 pension and you cannot draw it until you are 60). When you ‘draw’ your pension you stop paying into it and convert the fund you have saved into an income. Normally you do that by buying an annuity which is a guaranteed income for life (see Saga Magazine February 2002 ‘For Richer, For Poorer’). As life expectancy has risen, and interest rates have fallen, the income you get from an annuity has been cut to around half the level of 15 years ago. So even a fund of £100,000, which is five times the average, will only buy you a modest pension. A man retiring at 60 with a pension fund of £100,000 can buy a pension of only £4852 a year, rising each year with inflation. A woman of 60, who on average will live longer, would only get £4379. Both those amounts are from the very best annuity provider – if you choose a less good company you may end up with £1000 a year less.

That income can be boosted by almost 50% by putting off retirement until you reach 70. A man would get £7260 for his £100,000 and a woman £6219. In addition, your fund would have grown over those extra ten years – both from investment returns and, if you carried on working, payments you have made into it, boosting your pension still more. Table 2 sets out the amount you would get today for £100,000 at various ages.

People paying into company pensions have less freedom – the scheme will specify the normal retirement age for employees. Almost all fix it at either 60 or 65 and it must be equal for men and women. One important restriction is that you cannot draw your pension and carry on working for the same employer. So you will normally be expected to leave your job when the pension is paid. However, the Government may change that rule in the next year or two to allow a more flexible retirement, phasing out working life slowly rather than leaving with a bang.

If the Government did give notice that the state pension age was going to be raised to 70, many company schemes would adapt so that their normal retirement age would be extended too for new entrants. However, by 2006 fixed retirement ages may have to go and with them fixed ages to draw a company pension. By then European law will make it illegal to discriminate against people on grounds of age (see ‘Fit for work or fit for nothing’ Saga Magazine August 2002). That should also help people stay on at work to suit themselves. However, ageism is rife in the workplace. At the moment only one in three men is economically active at 65. Employers will have to change that and be willing to employ older workers, and older people themselves will have to be willing to carry on working. That may be fine for people with jobs that are not physically demanding. But many people who do difficult, boring or dangerous jobs will simply not want to carry on working beyond 60, never mind after 70.

One way or another though we will have to adapt to longer life by working later. Or we will all face poverty in retirement.

Source DWP

January 2003

e-mail Paul Lewis on paul@paullewis.co.uk