While rises in life expectancy have slowed, we’re still living longer. In 2020 there were 600,000 people over the age of 90 – which was up from around 450,000 ten years earlier. This is great news for us generally, but a massive challenge for the Government faced with paying our state pensions. It’s why it has been busy hiking the state pension age.
The pension age has already risen to 66, but it’s not over yet: it’s set to increase again to 67 between 2026 and 2028. It’s then set to rise to 68 between 2044 and 2046 – although in 2017 the Government said it would speed this up.
Even after all these hikes, we could still see more in the coming years. The general principle outlined by George Osborne back in 2013 was that people would receive their state pension for around a third of their adult life. Once we live to an average of 96, this would put the state pension age at 70.
Even when we eventually get to state pension age in the years to come, we have to wonder how generous these pensions will be. In 2020 there were an estimated 11.9 million people of pensionable age in the UK. This is expected to grow to 15.2 million by 2045.
The growth of this group is much faster than the general population, which impacts what’s known as the old-age-dependency ratio – the number of people of pensionable age for every 1,000 people of working age. This is projected to increase from 280 in mid-2020 to 341 by mid-2045.
It means that either the burden will fall incredibly heavily on the shoulders of working people, or state pensions could face cuts. Already the full new state pension will cover less than 30 per cent of average weekly earnings, so a lower pension could make it incredibly difficult to manage without savings of your own.
And there’s bad news on this front too. The Pensions and Lifetime Savings Association calculates how much money people need in order to have a moderate lifestyle in retirement.
This isn’t massively generous, but includes things like a three-year-old car replaced once every ten years, two weeks away in Europe and a long weekend in the UK each year, and £74 a week for groceries.
It says a single person needs £20,800 a year to cover these costs, while a couple would need £30,600 (including the state pension). However, the HL Savings and Resilience Barometer, produced with Oxford Economics, shows less than 40 per cent of people are on track to achieve this – including 35 per cent of Millennials.
It means we’re faced with three options. We can pay more into our pensions, we can make our pension investments work harder, or we can work later in life.
When money is tight it can be difficult to increase contributions, but it’s worth doing the sums to see if there’s anything you can spare. You can also check to see if your employer will match any extra pension contributions.
It’s also worth checking what you’re invested in through your pension. If you don’t know where you’re invested, the chances are you’ll be in your scheme’s default fund – because this is where you end up if you haven’t made an active investment choice.
In a default fund, you’ll probably have around two-thirds of your pension invested in shares, which give you the best chance of growing your money, with the remainder in bonds and cash which tend to fluctuate in value less. If you’re under 40 you can consider having a larger proportion of your pension invested in shares. Most pensions will give you some alternative options, so ask your employer for details.
For some, the gap between what they need to retire on and what they’ve saved means they may need to do a combination of all of these options – including working longer. If you’re unhappy at work this can seem a horrible prospect.
So if you’re hanging on for retirement, it may be worth considering whether you have any other options, and whether you need to change careers if you’re going to be in it for the very long term.
The good news is that if you enjoy what you do, working for longer doesn’t have to be the end of the world. I’m not sure how the Queen feels about doing her job for 70 years, given that she doesn’t have any choice in the matter. However, there are plenty of people who love their job, and are happy to work for as long as they can.
Last weekend I went to the funeral of a brilliant man who died over Christmas at the age of 81. He was an engineer who was still working as a consultant, and had been looking forward to getting stuck into a particularly challenging new project.
When you hear about people working until the day they die, you tend to assume they were dragging their bones reluctantly into work.
But if you’d have asked Roger how he felt about 60-odd years in the job, he’d have told you that things were just starting to get really interesting.