It may have risen by a record 10.1 percent earlier this week, but how long can the AOW last in its current form?
That’s the big question emerging from a newly published report commissioned by the government.
A major review of the state pension concluded that it is simply becoming too expensive; will have to give something.
Retirement pressure: Britain’s state retirement age – currently 66 – could rise to 74 for many of those toiling today
According to experts who analyzed the report, either the state pension age will have to rise quickly, which will hit everyone under 40 especially hard.
Alternatively, the triple lock (the mechanism that ensures payouts increase in accordance with whichever is higher – prizes, earnings or 2.5 percent) will have to be abolished very soon.
The debate comes just as France is reeling from protests over plans to raise the retirement age from 62 to 64 because of the unwieldy cost of paying a guaranteed pension to a rapidly aging population.
In Britain we face many of the same dilemmas (without the riots).
Fortunately, the government has postponed all decisions until after the next general election. But eventually the UK state pension age – currently 66 – could rise to 74 for many of those toiling today.
Worried? Confused? Here’s everything you need to know about when you can apply for your AOW…
What are the current plans to raise the state pension age?
As it stands, the age at which you start collecting your state pension (now £10,600 a year) is 66 years old.
But between 2026 and 2028, that will increase to 67 years. This means that the state pension age for women will be increased by seven years between 2010 and 2028.
The change will come into effect in phases, so that there will be periods when the state pension age is 66 and between 1 and 11 months.
But if you were born after 5 March 1961 and you are 62 or younger today, you are only entitled to a benefit when you are at least 67.
The next increase to age 68 was not planned until 2046, but it was rumored that the government would consider bringing that forward to 2035. That would have affected anyone born between 1968 and 1979.
However, the government postponed the decision until after the next election.
In the current situation, someone aged 45 or younger will therefore only receive the AOW when they are 68 years old.
Why do ministers keep launching these assessments?
The state pension age is revised every few years by the government.
Last year, ministers commissioned an independent report to support the latest revision.
This was carried out by Conservative colleague Lucy Neville-Rolfe. Every year the cost of paying a provision to pensioners rises by billions of pounds as it rises under the triple lock.
This week’s 10.1 per cent increase (in line with last September’s inflation) is expected to cost the Treasury an additional £11 billion.
The increasing number of people reaching state pension age – and higher life expectancy – also add to the bill.
This means that the state has to pay an old-age income to more people for longer than before.
At the same time, the number of employees – who pay the AOW bill through taxes – has continued to decline.
Pensions can be unaffordable within two years
The enormous cost of the state pension is only expected to increase. Lady Neville-Rolfe supports the government’s aim to limit the increase in state pension costs to 6 percent of GDP (our gross national income) between now and 2070.
Spending on pensions, health and social care currently stands at 15.1 percent of GDP and will rise to 25.6 percent in the 2070s as the number of retirees rises from 12 million to 17 million.
The state pension cost taxpayers £110 billion in 2022/23 – equivalent to 5.5 per cent of GDP.
According to calculations by Becky O’Connor of PensionBee, based on projections from the Office for Budget Responsibility, which tracks state spending, this could rise to £142bn and surpass the 6 per cent limit by 2025.
As a result, the state pension can be labeled ‘unaffordable’ by the government within two years, she says.
Rising costs: The next increase to age 68 was not planned until 2046, but it was rumored that the government would consider bringing that forward to 2035
This jeopardizes the mechanism to increase benefits annually, the so-called triple lock of state pensions, says Ms O’Connor.
‘It seems that state pension expenditure is likely to exceed the 6 percent limit within a few years,’ she says.
“So this opens up a whole new set of uncertainties around the triple lock and whether or not it’s possible to continue using it.”
Without the triple lock, millions of retirees would see their living standards fall as incomes fail to keep pace with the cost of living.
Limiting state pension spending to 6 percent could mean that the state pension will not be increased in some years – unless something else pays off, Ms O’Connor says. ‘Raising the state pension age may be the only option,’ she says.
John Cridland, who led the last independent report on the state pension age in 2017, warned MPs last month that the triple lock must be abolished to prevent the state pension age from rising.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
Baroness Ros Altmann, former pensions minister, says calculations she made during her tenure showed that removing the element of the triple block guaranteeing an annual increase of at least 2.5 percent would undermine the need to raise the state pension. -raising age would prevent – or at least reduce the pressure of endless walks.
Could you wait until you’re 74 before you can pack your job?
Today’s workers can wait much longer for their hard-earned state pension. Many younger people should wait until their mid-70s, experts warn.
Alice Guy, of stockbroker Interactive Investor, warns that today a 30-year-old might not get his state pension until he is 74 if the spending cap of 6 pc. is maintained.
As a result, they miss out on eight years of state pension compared to someone who reaches the state pension age today. That’s an estimated £209,432 in lost earnings, says Ms Guy.
Her analysis, based on Baroness Neville-Rolfe’s independent assessment, found that a 40-year-old should probably wait until they are 70.
Steven Cameron, of pension company Aegon, agrees that aggressive increases in the state pension age are looming.
‘It is not inconceivable that the retirement age will exceed 70 when you see how quickly it rises from 65 to 68,’ he says.
A further increase to 69 years is expected to take place between 2046 and 2048. This means those born in 1977 who are now 46 years old may be the first to wait longer.
According to the report, men who reached state pension age between 1996 and 2020 have spent 31 percent of their lives in retirement so far.
But with rising life expectancy, the state pension age must be raised to keep the balance at 31 percent.
Baroness Neville-Rolfe says it should rise to 68 between 2041 and 2043 – faster than currently set by law – and to 69 between 2058 and 2060, slower than currently expected.
However, if you need to increase the percentage of your life you receive state pension from 31 percent to 30 percent, the minimum retirement age must rise to 70 in 2062.
When first introduced in 1909, the state pension was only paid to men and women over the age of 70.
Analysis of data from the Office for National Statistics found that almost a third of people did not expect to have a pension provision in addition to the state pension at retirement
When will you know if your retirement age is changing?
If you are faced with an increase in your state pension age, you must report this well in advance. The government has promised to give ten years’ notice of any changes.
Still, many in poor health or physically demanding jobs may struggle to stay in work until age 70.
However, they may not be able to afford to retire without state pension and need to look for extra income somewhere.
Analysis of data from the Office for National Statistics showed that almost a third of people did not expect to have a pension provision in addition to the state pension at retirement.
Carole Easton, of the Center for Aging Better, warns that raising the state pension age too hastily could have devastating consequences.
Research carried out by her think tank together with the Institute for Fiscal Studies shows that the number of 65-year-olds living in poverty more than doubled in the two years after the state pension age was raised to 66.
“Future increases must be made with caution and with considerable advance notice, or large numbers of elderly people risk being plunged into poverty,” she says.
Good news! You may be able to apply for the state pension earlier
If the state pension age rises to 70 years, the rules can be relaxed.
The government has long urged to consider giving people early access to state pension if they are in poor health, unable to work because they have to care for a loved one or if they have worked in more physically demanding jobs.
Baroness Neville-Rolfe’s report asked the government to investigate.
For example, by conducting a test that allows people to take early state pension in exchange for a lower weekly income.
Mr. Cameron says his company Aegon has also called on the government to give older workers this opportunity.
It would mean that those who decide to activate it early accept receiving less as a trade-off.
This ensures that they do not receive more than their fair share during their retirement. “It is conceivable that the state pension age would be raised to 70 and this possibility of early access would make it much more attractive to people,” he says.
Baroness Altmann says paying out early to those with extra-long National Insurance records is another option.
‘If that is allowed, it might be easier to ask people to wait until the age of 70, especially now that more people are building up their own pension with which they can switch to the AOW,’ she says.
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