Jeff Salway: Pension age increase isn't quite as simple as adding on a year

Published on Wednesday 7 October 2009 20:56

IT'S AMAZING the difference that four years and one credit crunch can make.

While Lord Adair Turner's 2005 proposals for raising the retirement age sparked a "work till you drop" backlash, Tory proposals this week to hike the age at which workers can claim the basic state pension to 66 by 2016 met with more of a resigned acceptance.

The government's original proposals were made when Lord Turner, now the Financial Standards Authority chairman, but then head of the government's pension commission, outlined a gradual increase in the retirement age to 68 by 2050.

But the age 66 by 2016 proposal of the Tories attracted headlines less vitriolic than those that greeted Turner's original suggestions. So what's changed? Most obviously, the pensions landscape. Four years ago it may have been relatively simple for some to put the pensions crisis to the back of their minds – after all, those relying on their homes to fund their retirement were watching property values soar, while easy access to credit obscured the gravity of the debts that many were building up.

Since then, more firms have closed their final-salary schemes – around 90 per cent are now closed to new members – and stock market volatility has wreaked havoc with defined contribution pension values. Meanwhile, property prices have slumped and low interest rates have decimated the returns from savings on which many retirees rely for their income, exposing further the paucity of the state pension.

And that's before considering demographics. Those reaching the age of 68 in 2050 are likely to experience a rise in their life expectancy significantly outstripping the three-year estimate underpinning the Turner review's proposals.

In short, if it wasn't glaringly obvious that unpalatable changes were needed when Turner's commission reported in 2005, it certainly is now. Turner now believes he should have settled on 70 as a more appropriate eventual retirement age, reflecting the growing consensus that radical changes need to be made to UK pensions. Whether the Tories have the stomach to look at the wide-ranging reforms necessary remains to be seen, however.

On this evidence, they may be more inclined towards the quick fix. Bringing forward the government's planned increase in the male state pension age by eight years to 2016 – only a potential start date – is more of a money saver than a serious attempt to address the ticking pension timebomb.

While a hike in the retirement age is necessary, shadow chancellor George Osborne's proposals lack consistency and smack of a desperate Tory desire to avoid hitting high earners by removing or reducing tax relief on pensions. One of the arguments against such measures is that those tax breaks are an incentive and a reward for pension saving. One could retort that those benefiting most from tax reliefs, higher earners, are naturally more inclined to save anyway. Similarly, Osborne pledged to raise the inheritance tax threshold to 1 million within the first term. An obvious money saver surely, but no signs of the idea being scrapped.

So, lower-income workers are hit hardest, significantly undermining the pension age proposal. As the pension age rises, the flexibility of personal pensions will become more attractive, offering people more of an incentive to take responsibility for their own pension. But lower-income workers are less likely to have that freedom.

Then there's the default retirement age (DRA). In the absence of any word on personal accounts this week, what about making it easier for people who want to retire later than the pension age, allowing them to give their retirement fund a late boost?

As Age Concern and Help the Aged point out, there is a contradiction in raising the state pension age but retaining the DRA: as it stands companies will be able to force workers to retire a year before they can claim their state pension. The debate over the DRA also touches on another issue with the pension age rise: companies remain reluctant to hire older workers, so the state faces the burden of paying benefits to out-of-work 65-year-olds.

That the pension age needs to rise is undeniable, but it has to be as part of wider reforms that help those at the sharp end of the pension crisis.