The state pension age is set to rise next week, meaning anyone born after 5th October 1954 will need to be at least 66 years old to start collecting their savings.
From Tuesday 6th October, the pension age will increase, in the latest change to state pensions aimed at keeping the scheme affordable.
As people increasingly live longer, state pensions have undergone radical changes over the last decade to try and plug funding gaps.
Next week’s change will be the first one to affect both men and women.
Nearly four million women born between 1950-1954 have so far borne the brunt of the scheme’s overhaul, as the womens’ state pension age shot up from 60 to 66 years over the past decade, equalising it with men’s.
Two weeks ago, a court appeal against the changes to womens’ pensions was quashed, dashing the hopes of campaigners who said they weren’t given enough warning before the changes came into effect.
Pensions Director at Aegon, Steve Cameron urged people to use the coming changes to carefully consider their retirement finances and start making investments:
Recent increases in the qualifying age have aimed to make the state pension more affordable as we live longer, but those about to claim their state pension may be surprised at just how much it’s worth.
The full state pension is equivalent to more than £330,000 paid into a savings account over the years.
This may seem huge, but for most people, relying on the state pension alone won’t provide the lifestyle they aspire to in retirement. This is why it’s vital to plan ahead for the retirement you want by making additional personal provision, for example, by saving through a workplace or personal pension. And the sooner people start on that journey, the longer their contributions have to grow with investment returns.
He pointed out how investing early could help to buy an earlier retirement:
Private provision also offers more flexibility and could allow for a more gradual transition to retirement rather than having to keep working till a state pension age which could rise to 68 in the future.
The state pension age is set to keep rising over the coming years. From 2028, it will increase to 67 years old and then rise to 68 years old in 2037.
Although there are fears that one day the pension could be scrapped altogether, there is no official indication that there are plans to do so in the near future.
But Why Is There a Funding Crunch in the First Place?
Each generation of pensioners’ income is funded by the National Insurance contributions of those who are still in work when they retire.
If the total value of pension withdrawals exceeds the total value of National Insurance contributions, the state pension fund falls into deficit.
Fortunately, there is a second line of defence in the National Insurance Fund, which is like a giant savings account that can be used to top up shortfalls in National Insurance.
However, it is only designed as a short-term emergency measure, not as a long-term solution.
As the proportion of older people in the UK continues to grow, the total value of pension withdrawals is expected to exceed the value of NI contributions on a rolling basis.
By 2050, one-quarter of the population will be over the age of 65- up from just one in five in 2018.
At the same time, the percentage of people who are of working age is expected to fall to just 58% of the population by 2038, down from 64% in 2018.
And while migration continues to boost the working population- and, by extension, NI contributions- falling fertility rates means that the population isn’t getting any younger.
In 2018, the UK recorded the lowest ever number of live births. As a result, the average age of the population will continue to rise as the years go by.
The structure of the UK’s population is changing: people living longer and having fewer children means the age structure is shifting towards later ages”, said Sarah Coates, Office of National Statistics.
Increasing the state pension age is one way to artificially counter the imbalance between the numbers of working taxpayers and retirees.