The state pension has been part of life in the UK since 1946. It may not be enough to live on, but it does make a major contribution to most people’s financial planning after they retire.
Unfortunately, it is increasingly starting to look as though the days of the state pension may be numbered.
The government’s Office for Budget Responsibility estimates the state pension will cost around £125 billion this financial year. With a growing number of pensioners, many of whom are living longer, the costs are set to become unaffordable.
How the state pension works
Unlike private pensions, which invest money in individual accounts for future payouts, the UK state pension is financed from national insurance contributions and general taxation.
Retirees need to be balanced (and funded by) workers. When the system was set up just after WW2, this was not a problem. In 1951, the UK life expectancy was 66 for men and 71 for women, and pensioners simply were not around long enough, or in sufficient numbers to cause problems. The State pension was easy enough for the country to afford. There were 35.2 million workers who were supporting 4.5 million pensioners, or 7.8 workers for every pensioner.
But now we are living longer and having fewer children.
By 2011, life expectancy had increased to 79 for men and almost 83 for women This means that a 66-year-old in 2024 will receive a pension for an average of nearly 16 years. But falling birth rates mean that there will be proportionally fewer workers to provide it. Today, the UK’s has 33.17 million workers and 12.8 million pensioners. This means that every pensioner is being “supported” by just 2.6 workers.
The state, or rather the taxpayer, cannot afford to go on funding the current pension provision.
The current pension age of 66 is already set to rise to 67 by 2028, and to 68 from 2044. But research by the International Longevity Centre (ILC), a thinktank focusing on ageing, says that doesn’t go far enough. It suggests that anyone born after April 1970 may have to work until they are 71 years old, and the threshold for a state pension may need to go even higher than that.
A third of 18 to 34-year-olds have either stopped or cut back on pension contributions to save money – despite the fact that more than two thirds of this age group don’t believe the state pension will even exist when they enter retirement.
How long do you need to work?
Discovering that the state pension is being moved ever further out of reach might give you the idea that you will be working until you can’t work anymore.
It does not have to be that way – because you don’t have to rely on the state pension.
If you are an employee, you will be in a work pension scheme. These can be good value, as most employers contribute to your pension fund alongside you. But you probably also need a private pension. There are several types, but what they all have in common is the more you pay in, the better off you should be when you retire.
- They let you benefit from tax relief, paid on your pension contributions at the highest rate of income tax you pay. Currently a basic rate taxpayer only has to pay £80 to pay £100 into their pension. It’s even better for higher-rate (40%) and additional-rate (45%) taxpayers. That £100 only costs £60 and £55 respectively.
- The money you and the taxman pay into your pension is invested for you. With years of potential investment growth and the rewards of compound interest, your pension pot could grow to be many times the amount you put in.
- You have years of potential growth with the wonders of compound interest. Even small contributions in your early working years can add up significantly over time.
What to do now
If you are unconvinced about getting a state pension, call us at Continuum to discuss how a private pension could be the answer.
There is a lot to consider, and many pension providers. You need to be certain that you are planning your future with the one that is the best value for your circumstances.
We can find the providers offering the best value for your circumstances, and help you set up everything you need, including informing the taxman and getting him to start saving with you.
Call us today – because even if a state pension is not getting closer, retirement is.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment or retirement strategy, you should seek independent financial advice before embarking on any course of action.
A pension is a long-term investment, the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
Pension savings are at risk of being eroded by inflation.
The Financial Conduct Authority does not regulate taxation advice.
Welfare spending: pensioner benefits | Office for Budget Responsibility
