As the UK celebrates Older People’s Day, the debate over the current options for pensionsers and the prospects for future generations’ retirement starts to shift-up several gears.
News about reform of pensions, of the state, personal or company variety, seems to have been a weekly occurrence in 2010.
In the coalition government’s June budget, chancellor George Osborne announced changes to the way the current state pension is calculated to link it with someone’s earnings, the consumer prices index (CPI) or 2.5 per cent.
The previous government planned to introduce an auto-enrolment for employees in the National Employment Savings Trust (NEST) or an employer pension scheme, and increase the state pension age to 66 in 2026.
The new government is promising even more of a shake-up, proposing to end the requirement for a pensioner to take out an annuity scheme, reviewing the current auto-enrolment plans and consulting on whether the increase in the state pension age should be brought forward.
The Times newspaper has also reported that the government is looking at whether to make it easier for existing pensions schemes linking benefits with the retail prices index to switch to the CPI – historically increasing at a lower level.
The motivation for increasing the age for state retirement is to ensure the ongoing stability of state pensions with more people living for longer.
Ahead of the UK Older People’s Day, the Office for National Statistics published data showing life expectancy at birth has reached its highest level, at 77.7 years for men and 81.9 for women.
The number of people reaching 100 years of age has tripled in the last 25 years with 11,600 in 2009.
In the same period the percentage of those aged 65 and over has increased from 15 to 16 per cent, an increase of 1.7million, while the proportion of the population aged under 16 has decreased by 2 per cent. This trend is projected to continue.
While steps are being taken to allow people to work for longer and take some of the pressure off pensions, an ageing society poses other major challenges facing governments’.
Earlier this month the World Alzheimer Report predicted the global cost of dementia care would amount to $604bn, over 1 per cent of global gross domestic product, in 2010. The number of people with dementia is expected to double by 2030.
What the current changes mean for pensioners
If the methods for tackling the challenges facing healthcare are still being worked out, the affects of current pension policy changes will soon start having an impact.
The Pensions Policy Institute (PPI) said on 30 September that the auto-enrolment scheme ‘would give access to a low-cost pension with an employer contribution and is likely to encourage millions of people to save in a pension for first time - if it is introduced as planned in 2012.’
The PPI predicts a good rate of return from pension saving if young people save throughout their working lives; however, warned that the proposed charging structure meant older individuals may face higher changers and receive lower contributions than anticipated.
The other major change to pensions policy is the removal of the requirement to take out an annuity – an income paid from a scheme – by the age of 75. The government increased the age to compulsory annuitisation age to 77 in its June budget, with the consultation on complete abolition of the rule ending on 10 September.
Ending the annuity requirement will greatly improve the flexibility available to people in planning for and funding their retirement.
But with increased flexibility comes warnings about the implications for people who find their income falling short.
The coalition government’s proposal published in the June budget would create a Minimum Income Requirement (MIR) to prevent those managing their own retirement income from exhausting their savings and needing to fall back on the state for support.
The Pensions Institute at Cass Business School, in London, launched a report on 30 September warning about setting the MIR too low and the risks to pensioners of making their own investment decisions.
The report, sponsored by the pensions provider Prudential, said that annuities would continue to be the main way people secured a retirement income, predicted the annuity market would remain strong.
Barry O’Dwyer, deputy chief executive of Prudential UK & Europe said: “At their most basic level, pensions are a tax-incentivised locked-box to provide an income for people after they cease to be able to work. It’s important we don’t lose sight of that...While we agree with the government that there is a case for more flexibility we encourage it to take on board the analysis of this report and proceed carefully.”
© Fair Investment Company Ltd