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A new era dawns for pensions savings in the UK

There are not enough existing taxpayers to fund the pensions of retirees. Picture: David Moir

There are not enough existing taxpayers to fund the pensions of retirees. Picture: David Moir

  • by ALAN COLLINS
 

IN WHAT was a fairly predictable Autumn Statement, perhaps the least surprising measure of all was the accelerated increase in the state pension age which will rise to 68 from the mid 2030s and to 69 from the late 2040s.

It’s an expected move as people are living longer – over the last century, life expectancy in retirement has essentially doubled from around ten to 20 years.

This has added significantly to the cost of state pension provision and the historic retirement ages of 65 for men and 60 for women have become unsustainable.

Arguably the proposed transition to an increased retirement age was too slow in coming, which led the Chancellor to speed up the timescale for change.

The rise in the pensioner population has not been matched by increases in the working population meaning there are simply not enough existing taxpayers to fund the pensions of those who have now retired.

With this trend set to continue, this pension funding gap will widen and can only be addressed by paying lower-value pensions, increasing the state pension age further or introducing a significant rise in taxation. It is also likely these changes will increase the blurring of the lines between employment and retirement, with more people opting to continue working even when they are receiving pension income.

While this may not be a particularly cheery message, there is unfortunately no magic wand that can be waved when it comes to pensions. Simply put, the only way to avoid having to work longer to fund your retirement is to save more and, in particular, start saving earlier. Twenty-somethings who invest in a pension now can make a significant difference to their potential retirement age and income compared to those who put off saving until they are older.

The recent introduction of auto-enrolment could also signal a new dawn for pensions saving in the UK; initial signs are positive, with opt-out rates much lower than anticipated. An increase in employer engagement combined with a rebuilding of trust in the pensions system and more tax incentives could all help ensure a brighter future. That certainly is a more positive thought as we kick off the new year.

• Alan Collins is head of corporate advisory services at Spence & Partners

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