Best Laid Plans

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:

Notes: (1) from January 2019 Men and Women’s SPA are the same. (2) Increases under Pensions Act 2014 are by specified age (i.e. 66 years, 1 month). Other increases are by reference to dates (i.e. a woman born on 6 April 1953 reaches SPA on 6 July 2016). (3) The age someone is entitled to the State Pension is based on the last date in each band, For example, women born on and between 6 April 1953 and 5 May 1953 all reach SPA on 6 July 2016, the graph shows the SPA for the youngest person in the cohort (5 May 1953).

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:

Note: (1) Women and Men born from 6 December 1953 onwards share the same SPA

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:

  1. 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.
  2. 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.
  3. 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

 

References:

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

15 thoughts on “Best Laid Plans

  1. A great post YFG, that shows clearly the danger of relying upon something which is supposedly ‘set in stone’. I worry about those who have modelled their retirement drawdown incomes incorporating the state pension without a serious margin for error. My NHS pension has changed already in my short working life (nice little Government raid there), and I fully expect it to change again. As the population demographics push steadily towards a middle-aged spread I can’t see how we can avoid further pension changes, and as an avid listener to BBC R4s Moneybox I’ve heard all about the WASPIs. If we end up with a means-tested state pension (one of the ideas mooted) I can only imagine the fallout and Daily Mail-style outrage.

    https://www.moneywise.co.uk/news/2018-11-23/uk-state-pension-should-be-means-tested-says-international-monetary-fund

  2. On your point 2, do you have any data on trends in the proportion of retirees who have additional private pensions? My feeling is that current retirees are perhaps more likely to have other income than state pension, and auto enrolment will ensure future generations are more likely still.

    I am not sure I agree about the imminent demise of the state pension. It serves a very important public policy objective of preventing pensioner poverty – means testing is never as effective in that regard. We also have possibly one of the meanest state pension regimes among wealthy countries. That said, you can never predict what will happen in the future, and I guess I can see some kind of claw back for the wealthy (higher rate tax payers?) might happen.

    Final point – I thought future pension age rises were contingent on life expectancy rises – that’s not looking like a dead cert anymore!

  3. Love the graphics! I’m in two minds about the WASPI campaign. I do get that some women were subject to pretty rapid increases, and perhaps the communication could have been more effective, more persistent. That said, I’m someone who started working life with a pension age of 60 and now it’s 67. I have known about the equalisation of SP ages since, well, 1995! I do wonder what rock some of these people were living under!

    1. Hi Red Kite, as always, good to hear from you and thanks for the kind words.

      On trends in retirement income have a look at this excellent page from the ONS: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/workplacepensions/articles/howareprivatepensionsaffectingtheincomeofretiredhouseholds/2017-08-08. Your feeling is right that many more retirees have private pensions these days. Unfortunately, hidden in the data is a great disparity in pensioner incomes which has widened over the past 10 years or so.

      I’m glad you are more sanguine on the SP! As you say, it has been an important – and successful (despite reservations about the triple lock) – policy in reducing pensioner poverty.

      And you are right that pension age rises are contingent on life expectancy increases. The intention was to have people receive the state pension for one-third of their adult life. The Government revised this down to 32%. The independent Cridland review (2017) said that in order to meet this the increase from 67 to 68 should be done by the end of 2030. For a 32% factor, a further increase to 69 has to be done by the end of 2040. The review also said that the Government shouldn’t increase the SPA by more than 1 year each decade. Unfortunately, the Government hasn’t legislated on the back of the review. As far as I’m aware, as with many things non-Brexit, it’s been put on the backburner for the foreseeable future. You’re no doubt aware of the recent, dramatic, fall in life expectancy. The good news, in theory, is that the Government is required under PA2014 to conduct regular reviews to monitor life expectancy. The bad news, as I understand it, is that we are well past the point where we need to accelerate the increase to 68 (even accounting for uncertainty).

      p.s. My blind, hard of hearing mother knew her pension age was going from 60 to 67. And that was before I was even telling her!

  4. Interesting to see those changes laid out so clearly – thanks, YFG. A very steep climb for women of a certain age, due to government inaction for so many years.

    As ever, there are real people involved, not always the sort that are very well aware of finances and politics. I have two much older sisters born 2 years apart. One already nicely retired at 62, the other must keep going until 66. Imagine the underlying resentment at family gatherings!

    (I will be retiring long before my SPA – 67 – as you might expect and hope for a reader of this blog!)

  5. To be honest I’d selfishly rather they means test the state pension than get rid of the tax breaks for hrt payers . Sadly I can see that coming sooner rather than later

  6. We are an ageing society. Therefore the grey vote is important. Therefore future governments are unlikely to do anything so daft as to abolish or deny the State Pension to millions of people who’ve spent decades paying into the system. It’s politically difficult enough to means test a universal benefit like cold weather payments. And no government wants to be responsible for casting pensioners into the benefits system.

  7. Hi. I’m one of those who do not have much confidence in receiving the state pension when I reach retirement age. I now treat it as purely an insurance policy, i.e. if for some reason, all my other investments fail and I have nothing, then I will have to fall back on the state pension. Other than that, I assume I will get nothing, but still pay into it. See my post here: http://moneymongoose.com/articles/776-investment-with-infinite-return

  8. The depressing thing here is that rather than lobby for men’s retirement ages to reduce to bring it in line with women’s we’ve simply accepted that everyone’s retirement ages should increase. I wonder if that really is the case? I wouldn’t be surprised if we are looking at an increasingly two tier population with regards to life span ie a significant group who will comfortably make it to their late 80s or even 90s in reasonably good health, and a larger group who will struggle to reach 70 due to the compounding influence of bad genes, poorer access to medical care and poor lifestyle.

  9. “Many people have become overly reliant on the State Pension to live on.” I suspect that maybe you didn’t know many bottom-of-the-heap people forty years ago – for many of them the state pension was always going to be almost their sole income in retirement. Well, that and a boatload of subsidies from the taxpayer.

    “You’re no doubt aware of the recent, dramatic, fall in life expectancy.” A commenter on Worstall’s blog argued – with every appearance of expertise – that it’s an artefact due to a cocked-up census. Until I read him I hadn’t ever considered a census being cocked up. Hell, where I grew up the first census took place nearly 2000 years ago. You’d have thought that to do a decent census all you need do is ignore the ridiculous model espoused in the Gospel according to Luke.

    1. Hi Dearieme. As you know I wasn’t around 40 years ago (heaven forbid!) That said, I do remember 20 odd years ago seeing many pensioners living a pretty meagre existence. Many of them were my neighbours. My feeling behind such statements is the hope that people’s lot can get better over time. We’ve seen a pretty dramatic fall in pensioner poverty. But it’s still there despite a lot of effort and spending.

      I’d be very surprised if the fall was down to the census. As far as I’m aware the ONS figures are not based on the census – they are based instead on a three-yearly simulation using estimated births and deaths. I assume the commenter was referring instead to the decennial life tables, which are different. These are based around a census year.

      As a secondary point, the reported fall trails the fall that insurers/actuaries were finding (and telling me about) last year. Their calculations aren’t based on the census.

      That said, the census is (laughably?) inaccurate. It was a topic in a great book I read this month called “The Tiger That Isn’t” by the folks behind Radio 4 More or Less. Turns out counting is quite difficult.

  10. Thanks for that, yfg. ‘a three-yearly simulation using estimated births and deaths’: is that necessary? Why not just report every year the proportion of people who die, by age: thus you might report that of people aged 80, 10% died in year X, compared to 9% in earlier year Y. Since fact of death is well-diagnosed by doctors, and age at death is presumably easily established at least for people born in the UK, the only approximation would be the estimate of the number of people aged 80 in the UK. I confess I don’t see what role there is for ‘estimated births’.

    And then it strikes me: what if a disproportionate fraction of the people who emigrate (e.g. codgers retiring) are healthier than average? Would the figures for the stick-in-the-muds look worse just because their fitter cousins have pushed off to Spain or France or Oz? I dare say actuaries know all the good questions of this sort (and my experience is that actuaries are pretty capable people) but I don’t know how conclusive their answers can be.

    Anyway, in one way I’m delighted by the reported fall in life expectancy because I remember some years ago a debate on MSE between one of their conspicuously brighter commenters, who argued that there was no natural law that life expectancies must increase, and a bunch of dolts who seemed to hold that trends never end.

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