The government is to raise the Basic State Pension age by 1 year every 5 years, to reach 70 in 2035.
A government source quoted in The Times said the plan will put a schedule in place that will avoid government having to revisit the issue of the Basic State Pension age, year after year.
The news means that, while a retiring worker can take the basic state pension this year at 65, anyone now aged 45 or younger will be unable to do so until they reach 70.
The advantage for government is that those working until they are 70 will pay an additional 5 years of National Insurance Contributions, and draw them back, via the basic state pension, for 5 years less.
For workers, this is not such good news. The gradual increase in the basic state pension age will encourage many to work longer than they may have planned. Over half the working population regard the basic state pension as the mainstay of their pension planning (52% of UK workers do not pay into a pension, says Halifax) and are not paying into company pensions or private pensions.
Furthermore, government also plans auto-enrolment into company pension schemes through the National Employment Savings Trust (NEST) after 2012. This may create a generation of workers, now aged 50 and older, who will not accumulate significant pension savings or pensions income with just 10-15 years in the NEST. What they do accumulate and receive from NEST in retirement income they may lose again by forfeiting their means-tested pensions credits, which currently top up the basic state pension from £97.65 to £132.60 for a single, and from £156.15 to £202.40 for a couple. In other words, the government has arranged for us to save for our own pensions credits, rather than receive them as an additional return on those years of National Insurance contributions.
Government pension system ‘unstable’
Experts have been pointing out for years that the national pension fund, which pays the basic state pension, is not a fund at all – as it is not invested in stock markets or gilts or bonds, but held as cash and managed on a ‘pay as you go’ basis.
This pensions model means that the NI contributions paid in by the workforce this week are not invested, but used to pay next week’s obligations to former workers, today’s pensioners. In the private sector, such a system used for company pensions would be illegal.
This pensions model is fundamentally unstable, as it depends on more cash coming in than is going out. However, with increasing longevity, men are now living to 77, and women to 81. The number of pensioners is growing faster than the number of workers – there will be 3 people in their 90s for every newborn by 2050. This will increasingly strain the national pension fund.
Public Sector Pensions Unsustainable
Public sector pension schemes, such as those for the NHS, the civil service, or teachers, are also uninvested schemes which are incredibly expensive due to their generosity in the pensions they pay. To achieve pensions income equivalent to these schemes, which range from around £5,900 for the civil service to around £9,300 for the teachers, ordinary mortals would have to save 37% of their salary into private pensions or company pension schemes.
While the average private sector employee saves £30,000 – £50,000 during their working life, a pensions pot closer to £200,000 would be needed, to achieve the same pensions income as a teacher.
