This post started off as something very different. My original plan was to create a real-life decumulation strategy for an early retired couple (Julie and John) retiring at one of the worst points in history: 2000. I wanted to show how Julie and John would have fared with the Dot-com Bubble bursting swiftly followed by the calamity of the Great Recession.
Unlike many similar calculations, this would be a ‘real-life’ plan. My calculations would use the hypothetical couple’s ISA allowance. Would use actual mutual fund (and not index) returns. And would use partial annuities to bridge the gap to the State Pension. At that point, the couple would buy a final annuity and get a guaranteed inflation-proof income for life.
The calculations were going well until I ran into a snag.
State Pension Age increases.
My calculations left a gap. Not a massive gap, but a little under 3 months between when John thought he’d reach state pension age (1st January 2019) and when he actually does (6th March 2019). It messed up all my modelling. It left me wondering how Julie and John could have planned in advance for these changes. Whether you can. And if you should even plan for these changes.
Delving into the detail of how those changes work leads me to my post today.
Planning for the un-plannable
The State Pension Age had remained unchanged for a very long time. Since the National Insurance Act 1946, it was 60 for women, 65 for men. Those ages remained stubbornly static despite the massive increases in life expectancy and demographic changes in the UK.
But in 1995 things changed. Not because the SPA caught up with reality. But because of discrimination. European Directives said it was gender discrimination to pay men a pension later than women. As a result, the Government, in the Pensions Act 1995, legislated to increase womens’ SPA from 60 to 65, in line with that of men.
Taking a very generous view in how quickly they needed to sort the problem out, the Government mandated that the increases would start from April 2010 (15 years later!). Increasing by one month every two months (or 6 months per year), the women’s SPA would reach 65 ten years later, in April 2020.
When you can’t kick the can anymore
So far so reasonable you’d say. However, in 2011 the Government threw a spanner in the works.
The earlier (and arguably pitiful) attempts to increase the State Pension Age from 65 to 68 were not enough (Pensions Act 2007). Chancellor Osborne thought the SPA needed to increase much faster. Kick-starting the process in December 2018 (not 2024).
This meant that the women’s SPA would also need to increase faster still to catch up in time with the men’s SPA at age 65 by the end of 2018.
State Pension Age increases
At this point, I imagine your head is probably buzzing with all manner of ages and years floating about. So to help, I’ve created a diagram showing the State Pension Age increases, and to which Pensions Act they belong:
On the x-axis is the date, on the y-axis is the age a woman or man becomes entitled to the State Pension.
The key bit to notice is the increase in the Women’s SPA in the yellow box. This is the accelerated increase above the Pensions Act 1995 to ‘catch-up’ with the Men’s SPA.
A WASPI sting
You might be thinking this is all reasonable. Men and women should get their State Pension at the same age. And there is a pressing need to increase the SPA to reflect increased life expectancy.
Now I want to plot the same data, but in a different way:
One might spot a problem. That blue line shoots up very quickly for women born in 1953.
The long and short of it is this: a woman born on 6 March 1953 reached State Pension Age at 63. A woman born 9 months later on 6 November 1953 reached State Pension age two years later, aged 65.
However you cut it, that’s a big increase in a short space of time.
That irked a group of women who called themselves the WASPIs: Women Against State Pension Inequality.
I’ll avoid delving into those arguments. They do get rather heated and debated near to death. Though I will say that I think the rate of State Pension Age increases set out in 2011 is overly fast.
What can we do about it?
When it comes to the State Pension we are at the whims of Government. I am pessimistic on the future of a non-means tested State Pension. I’m not alone. Research by Nest shows that younger savers are cynical about how generous the State Pension will be when they reach retirement age. Or if the State Pension will exist at all.
For savers out there I think there are three ways we can protect ourselves:
- Don’t rely on the Government to keep you informed. Listen out yourself. I think that the State Pension Age increases were, and have been, widely communicated. However, that doesn’t mean the Government has communicated them well. Just like with the change in National Insurance contributions, it is incumbent for us, as savers, to take matters into our own hands and be proactive in understanding how changes affect us.
- Don’t rely on a single source of income. In my view, the State Pension has gone from being a safety net into becoming more of a mattress. Reliance on any one source of income is risky. Many people have become overly reliant on the State Pension to live on. And whilst the dramatic reduction in pensioner poverty is something to celebrate, it is concerning the level to which the State Pension is now the main source of sustenance for many people. Relying on the State Pension is very risky. That’s because the size and timing of your State Pension is dependent on all future Governments. Including the ones, you won’t like.
- Nothing changes. Then everything does. We went 50 years without any changes to the State Pension Age. Then, between 2007 and 2014, we had three changes in quick succession. The power of the inertia and the default option is strong. But once it is broken, the rules no longer apply. Prior to Philip Hammond becoming Chancellor, you could count the number of massive changes to pensions, savings and tax by counting the number of budgets. Whilst the recent respite has been kind, don’t expect it to last forever. The Government’s framework says that there should be future State Pension increases in the 2030s and 2040s to bring the SPA up to 69. Right now, the can is being kicked down the road again. Things will change, and when they do, expect to be very quick and very significant.
All the best,
Young FI Guy
Check your own State Pension Age – gov.uk – https://www.gov.uk/state-pension-age
State Pension Age Timetable – gov.uk https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/310231/spa-timetable.pdf
Pensions Act 1995 – Schedule 4 Part I
Pensions Act 2007 – Schedule 3
Pensions Act 2011 – Part 1
Pensions Act 2014 – Part 3