Many employees are already concerned about their pension provisions and the proposed reforms are likely to cause further anxiety among Britain’s working population. Therefore, it is incredibly important that employers properly communicate the state pension age changes, as well as general pension information, to ensure employees fully understand how they will be affected.
First, employees need guidance on calculating their state retirement date. Before April 2010, working this out was straightforward; men would reach state retirement age on their 65th birthday, and women on their 60th. Now, it is much more complicated as SRA for women will steadily rise from 60 to 65 and then both men and women’s SRA increases from 65 to 66. This will result in a whole spectrum of state pension ages, such as 63 years and seven months or 65 years and four months.
Crucially, employees will also need to know how the state pension age increase will affect their workplace pension. Some people may still decide to leave work at 65. Others may wish to phase-in retirement by dropping to part-time hours before retiring fully. These people will now need guidance on whether this option is still practical, given the extra year’s wait for their state pension.
But whatever the personal situation, there’s no getting around the fact that people are living longer and the associated cost to the taxpayer is growing. Today, according to the Office for National Statistics, 65-year-old men and women can expect to reach 82 and 85 respectively. At an annual cost of £50 billion a year, according to the Department for Work and Pensions (DWP), state pension provision is already unsustainable and set to grow still further.
Increased life expectancy has already had a negative impact on annuity rates, effectively making pensioners poorer. In the mid-90s, a 65-year-old man could collect an income of £1,145 a year per £10,000 invested in an annuity. Today, says Moneyfacts, his income would be almost halved, at just £625 a year per £10,000 invested. On the bright side, however, more years in employment means people have longer to save towards their retirement.
What must be avoided at all costs is pensioner poverty. Around 2.5 million pensioners are currently living in poverty, according to Age UK, and the expectation is that state pensions will decrease in value over the next few decades, not increase. But, while most people have come to terms with the uncomfortable inevitability of having to work longer, the majority aren’t willing to accept receiving a pittance after (potentially) 50 years of paying national insurance contributions.
Pensioners should be rewarded with a comfortable and peaceful retirement – they shouldn’t be fretting over whether or not they can afford to pay the heating bill. While it’s essential that the most vulnerable are protected with access to state benefits at retirement, the working population must strive to put their own provisions in place wherever possible.
Organisations, and the Government, can assist employees with this by helping them understand the importance of adequate pension planning and saving. This means starting early, contributing enough and investing effectively. As the spending review demonstrates, how much income a person can expect from the state at retirement – and even when a person can expect to receive it – is subject to change at any time. This makes it even more crucial that individuals have their own pension provisions in place, instead of relying on the state – and HR directors should be one of the key communicators of this.
Lauren Peters is head of financial education at MoneyinMind.com
