How to advise your clients if the state pension goes up

Author: Maria Espadinha

Maria Espadinha

Senior Reporter of Financial Adviser and FTAdviser

An increase in the state pension age – as the one recently proposed which would see retirement set at 75 by 2035 – would have major implications to financial advisers’ clients plans, which would need to come up with different ways to make up for a shortfall of around £84,000.

In August, the Centre for Social Justice - a think tank chaired by Iain Duncan Smith MP, former secretary of state for Work and Pensions – suggested the government should increase the state pension age, with a first rise to 70 by 2028, due to the challenges posed by an ageing society to the UK’s fiscal balance.

The age at which individuals can claim their state pension is set to rise to 66 by 2020, to 67 between 2026 and 2028, and to 68 between 2044 and 2046.

Sir Steve Webb, former pensions minister and director of policy at Royal London, noted that the proposed increase “is on an incredibly aggressive schedule, which would cause people to have to radically re-shape their retirement plans with very little notice”.

Sir Steve noted that for someone who had always planned to retire at 65 but who wouldn’t get a state pension until they were 75, an extra pension pot of around £84,000 would be required to make up the shortfall.

He said: “Not many people will be able to make up that amount at such short notice.

“Advisers would be likely to find that clients are focused on retiring before the new state pension age, and on financial planning to bridge the gap between stopping work and the state pension cutting in.

“They may be asked about ways to bring forward income, which could include defined benefit transfers of smaller pots and possibly equity release.”

The CSJ report, which also proposed a raft of other measures to tackle the UK ageing society issues, stated that the state pension is the largest single item of welfare spending in the UK, accounting for 42 per cent in 2018.

The state pension bill has increased from £17bn in 1985/86 to £92bn in 2016/17, representing an increase from 3.9 to 4.6 per cent of GDP.

Malcolm McLean, senior consultant at Barnett Waddingham, noted that secretary of state for Work and Pensions Amber Rudd has already dismissed the proposed changes.

However, it “was noticeable that she didn’t rule out similar proposals for ever and a day,” Mr McLean said, which means this is a topic advisers should pay attention to.

Despite considering that the wealthy wouldn’t suffer from an increase in the state pension age, for others of “lesser means, advisers will have a key role in spelling out to them the consequences of inadequate saving into a private pension arrangement, and/or not being physically able to remain in work right through the time the state pension kicks in,” he noted.

Mr Mclean said: “Much will depend on when the individual ideally wishes to retire from work in and if that is a year or two before their state pension age, say at age 68, a savings plan will be needed to generate sufficient capital at their projected retirement date, so as to be able to provide a sufficient income stream to see them through to their state pension age.

“With a pension plan that could mean an uncrystallised fund pension lump sum, drawdown or a short-term annuity.”

For Fiona Tait, technical director at Intelligent Pensions, the recent controversy caused by the CSJ report underlines the need to build up personal retirement savings in order to supplement state pension payments.

She noted that “too many people still believe the state pension will be sufficient to support their needs in retirement”.

She said: “Previous research from Royal London shows that nearly half of people under 30 think it will be their main source of income in retirement, despite an equal proportion believing it won’t even exist when they reach state pension age.”

Ms Tait argued that the state pension is intended to prevent poverty, not to provide comfort, so regardless of the age at which it is available the vast majority of people should be looking to build up private pension savings as well.

Ricky Chan, director and chartered financial planner at IFS Wealth & Pensions, explained that a rise in state pension age could also impact those in a DB scheme linked to the official retirement date.

It could also affect the minimum pension age for accessing defined contribution pensions, which is currently set at 55, 10 years before the state pension age at the time it was introduced. Mr Chan said: “It could throw a lot of earlier financial planning done for clients out the window (as some may be looking to access funds at say age 60).

“So, there may be a shift in favour of ISA/general investment account type products where there’s no age restriction to access the funds, and more faith being eroded from pensions due to ever changing legislation.”

Ms Tait concluded: “Many people will use their private pension savings to retire, or partially retire, in their early 60s with the state pension providing a guaranteed income stream to underpin their spending later on.

“This guarantee is invaluable, but the reality is that the CSJ has a point. The state pension age may not rise now, but the fiscal impact of an ageing society means it may well do in the future. And going by their [government] record to date, we may not get much notice of it.”

Maria Espadinha is a Senior Reporter of Financial Adviser and FTAdviser

Published 05/09/2019

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