The State Pension is a key building block for financial planners undertaking retirement planning strategies with clients. Henry Tapper, strategy director at First Actuarial, takes a look at the details and asks how sustainable the State Pension is likely to be in future
As I begin this analysis of the State Pension, the old quote attributed to Benjamin Franklin springs to my mind “in this world nothing can be said to be certain, except death and taxes”. Sadly, this did not include pensions, not even the State Pension. Behavioral science suggests that the further we look into the future, the more we crave the security of certainty. But life (and death) aren’t like that and anyone who has ever conducted a cash flow forecast knows they are putting their finger in the air.
While we can philosophize about the “ineluctable modality of later life”, that won’t get us very far. Your clients, like all of us in fact, crave certainty and relative to other sources of retirement income, the State Pension comes up with it.
The State Pension – under the microscope
If you go to https://www.gov.uk/check-state-pension and input your Unique Tax Payer Reference, you will see something like this.
This example is the amount which I can expect as a pension from my 67th birthday but this is not guaranteed. As the WASPI women have found out, the date at which state pensions are payable is a moveable feast and it moves with the Government’s estimate of life expectancy for all of us (us= UK population).
The WASPI women expected to retire earlier than men and they’re finding out that that advantage has been taken away from them. This is because of UK and European law which requires state pensions to be equalised. During the last 30 years, the law has changed. Generally, the law has changed for the betterment of women, but in this case it has worked for the worse. Our retirement finances are subject to the vagaries of the law and this is one reason we must keep our fingers crossed.
Can I be sure that the Government won’t push back my retirement age (as it already has)? Well no, but the closer I get to my State Retirement Age, the less likely is it that I’ll have to wait longer.
There is still a corridor of uncertainty but that corridor is getting narrower. The WASPI women claim that they found out too late about their having to wait longer and that the Government hid this information from them. They have some grounds to be aggrieved, part of the contract Government has with all its citizens is to keep them informed.
Nowadays we have to keep ourselves informed about pensions -or as a professional adviser – you have to help your clients inform themselves. Things are liable to change and it’s not just the “when”, it’s the “how much”. At the moment, that £159.55 is good only for this year.
The rate of basic State Pension is increased from April each year by at least the level of growth in average earnings. The current Government’s policy is that the basic State Pension will increase each year by the highest of:
- growth in average earnings
- prices increases
- 2.5 per cent
For instance, in tax year 2016/2017 the basic State Pension rose by 2.5%. But in April 2018 it is likely that price increases will be in excess of 2.5% and earnings growth even higher. As readers will know, this is known as the triple-lock; you are guaranteed (for as long as the triple lock survives) an increase in your state pension entitlement of the best of the three numbers bulleted!
Of course, it would be good if we knew what inflation was going to be and it would also be good if we were to know if the triple lock would last forever. The truth is we don’t know either of these things. We can only guess.
So far I’ve been talking about what I know about myself, the forecast in this article is my forecast. If I scroll down on my forecast I find out more interesting information about me. I discover that the amount I can expect is dependent on my contributing more national insurance.
To get my final £14.20 per week, I need to work for another four years. That’s because I spent some of my life not contributing enough national insurance. I don’t owe money, I was contracted out of the state pension and so currently only have 31 out of the 35 complete years I need to get my full entitlement.
It looks like the 11 years when I didn’t contribute enough, gave me two full years of credits, so I have the equivalent of 31 years national insurance contributions.
This is really helpful to my retirement planning. It tells me that I have every chance of getting to my full state pension, despite being contracted out of the second state pension (what used to be called SERPS) for a number of years. This certainty I have in numbers.
Talking people through their entitlement to the State Pension is an incredibly important and rewarding part of our job. The people who I do it for, are really grateful, especially when I explain the small print and put their expectation in the context of others. One suggestion for advisers is to make sure your clients have their HMRC User ID and password to hand (and an internet connection handy) when you do!
You’ve never had it so good – the politics of the State Pension.
The idea of the triple-lock would have been unthinkable for much of the past fifty years. Wage and price inflation have been far too high for far too many of these years for such a promise to be affordable. The triple lock was introduced in 2010 by the coalition Government. It is proving very popular, especially by those in retirement (who are good at voting).
In its quinquennial review of the national insurance finances in 2014, the Government Actuary (GAD) made it clear that the triple lock was not affordable for ever, the triple lock was -to GAD- a way of getting the State Pension back up to a level where it provided everyone with a minimum safety net in retirement. We may feel that £8,325 pa is too little to live on, but it is a lot more than could have been expected – even in 2010.
The Government Actuary points out in his review that “private sector provision” and in particular its increase due to “the impact of auto-enrolment” and the “pension freedoms;
“could open up consideration of phasing options starting in 2020 for securing greater sustainability of State Pensions and the National Insurance Fund”.
This is a coded way of saying that provided we are saving more, the Government could turn off the triple lock by the end of the decade.
We may look back at this decade as the “good old days”, at least for the State Pension. The clear message for your clients is that none of us expect the State Pension to increase into the next decade as fast as it is at the moment and that the nice surprises we get when we revisit the State Pension portal, are unlikely to last. There is some certainty in that.
What else can you expect from the state?
Most people who cannot afford to pay for financial advice, will be dependent on the system of further state benefits in retirement, known as Universal Credit. However, the level of those benefits and how and to whom they become payable, is important, especially when – like me – you talk with people in the workforce who are on low incomes.
The certainty of these benefits being available is unfortunately low. The universal credit system is not properly understood because it is complex and often unfair. The acknowledged expert on these matters is Gareth Morgan (the Ferret). If you would like to bone-up, as I do, you can visit the Ferret website – http://www.ferret.co.uk.
To be fair to Government, Universal Credit is new and has yet to bed down, we can be reasonably certain that the current unfairness will reduce over time. Never the less, the reality for most people on very low wages is that – unless they are very careful – they could reduce their entitlements to benefits under Universal Credit, by being seen to draw income from private pensions.
It is worth reminding wealthier clients who are concerned about the uncertainties of their retirement planning, that the uncertainties for those who do not have their wealth are much greater. The increased dependency that poorer people have on state pensions and benefits in retirement are much higher than those of us with money.
There is one final point which is important, but often ignored, with regards to the payment of income in retirement. Money arising from pensions, whether state or private, is not subject to national insurance and is therefore more valuable in the hand than “earned income”. This, combined with the increased age-allowance and certain un-means tested universal benefits (bus passes, TV licence reductions etc.) mean that life in older age is financially less taxing.
Are there risks from perceived inter-generational inequalities?
But, as with the benefits themselves, the taxation of benefits is not written in stone. Economists such as Paul Johnson are keen to point out the increasing inter-generational transfer from the young to the old which is sociologically and politically unsustainable. While there is good reason for Governments to reward the old, these do not include bribing them for their votes. The baby booming generation, who form the majority of financial advisers’ clients, should be aware that they cannot have it their own way – forever!
The certainty of the current benign conditions pertaining to State Pensions and benefits needs to be viewed in the light of these large “macro” considerations. In the final analysis, the nation has to ask of itself – “can we afford all of this?”. Unless we see a substantial increase in productivity (GNP), I think we can be certain that the answer to that question is “no”.
Henry Tapper – Biography
Henry is a commentator on pensions. He runs Pension PlayPen which provides advisers with outsourced pension reviews for auto-enrolment; he is strategy director for First Actuarial, which focuses on small and medium sized occupational schemes. For the first 15 years of his career he was an IFA, before becoming head of sales at Eagle Star/Zurich corporate pensions. If you haven’t come across him on social media, you don’t use social media.
Twitter – @Henryhtapper