Shock delay to pensions will hit thousands

By JEFF SALWAY
Published on Sunday 19 February 2012 00:00

THE government is contacting people whose pension age is being put back over the next few years - and the news is set to come as a shock to thousands of Scots who won’t be getting their state pension when they had expected it.

Around half a million people in Scotland will be drawing their pension later than they expected due to the equalisation of the men and women’s pensions at 65 and the subsequent increase to 66.

And many more people north of the Border face a longer wait for their pension due to further increases being phased in over the coming years.

The Department of Work and Pensions last month started writing to those affected by the change and will continue doing so throughout March. It is urging people within 20 years or so of their retirement to check their state pension age to avoid being caught out and to begin planning ahead.

About eight million people in the UK aged between 42 and 51 face working for an extra year after the government confirmed that the pension age will now hit 67 a decade earlier than planned, in 2026.

Alison Fleming, head of pensions at PwC Scotland, said there was little public awareness of the changes. “A lot of people don’t know for certain when they are going to be entitled to their state pension,” she said. “Plans need to be put in place now – this is no longer a far-off scenario. For many people for whom the state pension is a major part of their retirement plans, their hopes of retiring at a particular age will have to change.”

People face a “stark choice between working longer, saving more or retiring poorer”, said Fleming, who says there is some confusion over what the pension age actually means.

“A common misconception is that the state pension age is the same as your retirement age. But if you have personal or employer pension provision your retirement doesn’t have to be in line with the state pension date,” she said.

All men and women under 56 will have to wait until they are at least 66 before they can collect their state pension. Women will be the hardest hit, with some 2.6 million across the UK having to wait longer. Currently a woman can start collecting her state pension at the age of 60 years and seven months. But the changes will see the retirement age for men and women equalised at 66 between November 2018 and October 2020, rising to 67 by 2028. This means about half a million women born between 6 October 1953 and 5 April 1955 will have to wait an extra year or more to get their state pension. Another 300,000 face waiting 18 months longer than under the previous timetable, affecting those born between 6 December 1953 and 5 October 1954.

There’s another timetable of increases to a pension age of 67. As it stands all people born after 5 April 1961 but before 6 April 1969 will now have a state pension age of 67.

However, the increases are expected to accelerate over the coming decades as life expectancy rises.

John Lawson, head of pension policy at Standard Life, urged those who still want to retire at the current state pension ages of 60 or 65 to start planning ahead. “If people want to take control of their retirement age and be retired for longer, without the support of the state pension in the early years, they’ll need to start planning and investing more now,” said Lawson.

In other words, you can retire when you originally intended to if you have – or can generate – the funds to bridge the gap.

“Look at any benefits you’re entitled to, your own savings, your employer provision and consider your tax-free cash sum,” said Fleming at PwC.

This refers to the option of taking up to 25 per cent of your pension tax free after turning 55 (one that should only be explored with the guidance of an independent financial adviser).

“If you’re not getting your pension until a year later than previously expected you could use the tax-free cash to bridge the gap,” said Fleming.

The other main options are to keep working or try to make additional savings. “If you do this in something such as an individual savings account it could roll up into an amount sufficient to tide you over for period until your pension age,” said Fleming.

For example, if you’re currently 50 and still want to retire at 65 you will need to save an additional £80 a month to compensate for the loss of two years of state pension income between 65 and 67, according to PwC (based on current rates of return).

A 40 year-old woman who faces waiting until she is at least 67 would need to save an extra £40 a month to still be able to retire at the current pension age of 60 and bridge the seven-year gap until she can pick up her state pension.

There is a potentially positive side to all this, however, as it provides extra time to build up a bigger pension pot

For example, women typically have lower private and employer pension provisions, while many who have taken breaks in their working lives to raise families may be short of the 30 years of national insurance contributions (NICs) needed to qualify for the full basic state pension.

Those contributions can be topped up with voluntary class 3 NICs if you already have 20 years and your state pension age falls between 6 April, 2008, and 5 April, 2015. You can pay for six missing years dating back to 6 April, 1975. “If people are able to clarify what their state pension age is they can get thinking about what to do about it,” said Fleming.

To work out your state pension date, visit www.direct.gov.uk/spacalculator or call 0800 678 1132

Life goes on: will you still be working at 76?

The timetable for the increase in the retirement age has been set for now – but further changes made as life expectancy increases will mean those currently in their early 20s are looking at a retirement age of around 75.

Graeme Forbes, chartered financial planner and managing director at Intelligent Capital in Glasgow, said: “In the UK in the last 40 years, male life expectancy has gone up by ten years on average from age 68 to age 78 and for women up by seven years on average from 75 to 82. The real cost of a pension for a man at age 65 now is around three times as much and for women retiring at 60, it’s up by 50 per cent.”

Both Forbes and John Lawson at Standard Life believe the UK will adopt a system in which the pension age is directly linked to life expectancy, as in Scandinavia.

“If that trend continues and state pension age were to start changing in line with life expectancy after 2026, the retirement age would need to rise by one year roughly every five years [averaged across male and female],” said Lawson.

“That would mean people who are currently 30 would find their state pension age increasing to 72. And those who are currently 21 could see it rise to 75.”