Justin Wray of the Association of British Insurers explores the different ways in which the rising state pension age is affecting people approaching retirement, and how employers, pension providers, and policymakers can help.
As the state pension age rises from 66 to 67, people in their early 60s will be affected differently depending on their circumstances. To illustrate this, we consider three individuals and explore how government, the pensions industry, and employers can support those in comparable positions.
Mr Smith, and the importance of communication
Let’s first take Mr Smith. We’ll assume he is one of the nearly two-thirds of individuals who, according to research from Just Group, stop working before they reach state pension age.
If Mr Smith had been planning to rely only on the state pension from 65, there is unfortunately more or less only bad news from the increase to 66. After the most recent increase from 65 to 66, 65-year-olds lost on average state pension income worth £142 per week across that year, and the proportion of this age group in poverty increased from 10% to 24%.
This highlights the importance of widespread and early communication of changes to the state pension age – 10 to 15 years in advance is not overdoing it.
Ms Bloggs, and the ‘underpensioned’ issue
Now, we’ll look at Ms Bloggs. As a woman, Ms Bloggs is in one of the groups who are particularly underpensioned, alongside renters, the self-employed and some ethnicities.
Like Mr Smith, Ms Bloggs has also stopped working before reaching the state pension age. But, unlike Mr Smith, she also has some private pension savings, most likely through her workplace.
The increase in state pension age raises the likelihood of Ms Bloggs having to make adverse choices with her private pension. According to the Financial Conduct Authority, 56% of pension pots accessed for the first time are taken fully as cash, and almost half of pension pots are drawn down at an unsustainable rate of 8% or more.
This is why awareness of the interplay between state and private pensions is vital. And although it may not feel like it, those such as Ms Bloggs will be better off than those younger than her, as occupational pension income is forecast to fall in real terms between now and 2050.
Ms Jones, and supporting greater pension saving
Measures such as targeted support for the 91% who don’t take regulated financial advice on their pension choices are important to help people understand how to manage their savings. Additional developments, such as pensions dashboards and the Value for Money framework, will also help savers plan more effectively for their retirement.
Ultimately, however, these measures cannot replace a pension pot that is too small. Contributions also must be part of the conversation. An increase in pension contributions in the coming years to 12%, split evenly between the employer and employee, will help more workers accrue an adequate level of savings throughout their lives.
Finally, let’s assume Ms Jones is still working – the impact of the previous increase in the state pension age was a significant increase in employment among 65-year-olds.
Her employer can help her navigate the transition and stay in work longer through health insurance and protection insurance, which can help employees access healthcare to support them to stay in work and get back to work after a period of ill-health.
Flexible working can also help. While flexible working is now a day-one right, by advertising roles as open to flexible working and setting out policies clearly, firms can attract experienced talent and support people to thrive in later‑life work. Our Making Flexible Work Charter commits firms to making their flexible working policies transparent, accessible, and easy to understand from the very start.
Justin Wray is head of long-term savings policy at the Association of British Insurers.
