Tax hike warning as longer living set to hit pensions

SHARP tax rises will be needed to maintain state pensions at their existing level in the face of accelerating longevity increases, it has been predicted.

The number of pensioners in the UK will rise by a third by 2033 to 15.6 million, up from 11.8 million now, according to new figures from the government's Office for National Statistics. Of the 15.6 million, around a fifth will be over 85, two million more than last year.

The figures are higher than the life expectancy data underpinning government proposals to increase the state pension age to 66 by 2026 then up to 68 by 2046.

As a result, substantial tax rises will be needed just to sustain even the current basic state pension level, claimed Marcus Hurd, head of corporate solutions at Aon Consulting. He pointed out that population increases would only ease the pensions burden if there were more people paying tax to fund those retiring, which is not the case.

"Under the state pension system, current taxpayers are not really contributing to their retirement income at all, they are merely paying for their parents and grandparents," said Hurd.

The expected 32 per cent increase by 2033 in the number of pensioners in the UK would necessitate the same increase in the amount paid in pensions, said Hurd.

"There is some mercy because the ratio of taxpayers to pensioners falls from 3.2 taxpayers for every pensioner to 2.8, hence the net increase in the burden per taxpayer is 14 per cent," he noted.

But by 2033 at least 1.5 million pensioners will need to delay their retirement in order to restore that ratio to the current level, which would require adding at least two years to the state pension age, according to Hurd.

"In other words, the total state pension bill would have to rise by 32 per cent and the total bill for each individual would have to rise by 14 per cent to maintain the same level of benefits," he said.

"Another equally unpalatable option is to reduce the UK state pension, already the worst in Europe, by 14 per cent."

The Conservatives recently proposed bringing forward the rise in the state pension age and the Institute of Directors this week called for the retirement age to be raised to 70 as soon as is "reasonably practical".

Rash Bhabra, head of corporate consulting at Watson Wyatt, said the latest life expectancy figures had added fuel to the retirement age debate. "The political debate is about whether to bring forward the increase in state pension age to 2016 for men and 2020 for women. If the sole benchmark were the official life expectancy projections, a faster change could be on the cards."

For men to claim the state pension for an average of just under 21 years and women for 23 years – the government target – the pension age would need to rise to 66 almost immediately, Bhabra added.