Despite writing about personal finances and pensions for nearly a decade I’m not immune from the odd moment of realisation. My most recent Damascene conversion was around the state pension and when we should be able to begin drawing it.
The state pension has taken up a lot of my time recently. The triple lock has felt at its most tenuous since the Coalition government introduced it in 2010, and not surprisingly the statistical quirk caused by the pandemic and furlough means the formula has now been tweaked to avoid an embarrassing and expensive boost to pensioners’ income.
We have long known that pretty much every Chancellor since George Osborne has wanted to scrap the mechanism. It has, quite rightly, given a shot in the arm to what we must remember remains one of the stingiest government retirement benefits in the developed world. But the lock, even watered down, also appears overly generous in the context of intergenerational tension that pits defined-benefit-pension-wielding property millionaire boomers against Generation Rent. Philip Hammond, Theresa May’s chancellor, was open about the Tories’ desire to weaken the lock. He just wasn’t around long enough to see it through. So, yes the lock will almost certainly change beyond the suspension announced last month.
More radical than playing with the triple lock, I think we should tweak the state pension system to allow early access from the age of 55 – or whatever age private pensions can be drawn tax-free in the future. Please, stop shouting – I can’t hear you. Like you, I had always dismissed this as a bad idea. For starters, at first glance this looks like an excellent way to introduce complexity, as if pensions needed any more of that. Secondly, there is lots of research that shows most people are horribly bad at predicting their own demise, with the usual error being underestimating life expectancy: ‘My grandad died at 64 so I probably will, too’. So there’s certainly a risk lots of people ask for the pension tap to be turned on about 15 years too early and by their 90s are left surviving off a trickle. And yet.
As the state pension age disappears off over the horizon, there is growing appetite from millions of people to get at that cash. The various campaigns to row back the state pension age, from Waspi to Back to 60 arguing that women born in the 1950s need some form of compensation, to the latest petition – now at 9,000 signatures – for everyone to have a state pension age of 63, shows that this is not going away.
If the state pension age keeps rising and life expectancy growth continues to slow, or stops entirely, those calls will get louder. More than a third of the thousand people I commissioned AJ Bell to survey said they would consider taking their state pension early even if it was cut. If it was a genuine possibility, there’s no doubt that number would be higher.
Remember, most people who don’t work in financial services don’t realise they are one tiny part of an enormous mortality cross subsidy scheme. The gulf between the richest and poorest parts of the country means this really matters. The gap for men was more than 10 years in England in 2017-2019, according to most recent ONS data. In Blackpool, life expectancy for a male at birth was 74.4 years, compared to 84.9 years in Westminster.
That is staggering, particularly when you think that those people destined by demography to live shorter lives are also more likely to work the kind of jobs that are difficult and often painful to do in later life. They might well be forced into early retirement and then spend a decade or more waiting until the state pension kicks in. Surely it’s better for someone in that position to stop working when their body gives out at 55 on a reduced state pension that at least gives them something to fall back on. Yes, auto-enrolment should mean that eventually workers build up decent retirement pots but there is an enormous part of the working population that is too old to benefit from those reforms. They may have a few thousand pounds at 55 but it certainly won’t be enough to retire on.
Another plus, contrary to my earlier point, is simplicity. Fully aligning the private and state pension ages makes more sense than having them linked but not the same age, as is the case now. We already trust workers to decide when to take their private pensions and defined benefit members have had the option for years. Let’s take the next logical step.