Raising the state pension age: auto-retention in the workforce

Auto-enrolment is automatically putting millions of people into pension schemes, although they can opt out should they wish. Raising the state pension age will automatically keep millions in the workforce, who could not afford to opt out.

Raising the state pension age can affect less well-off people more than the affluent for two reasons:

1. On average, more affluent people live longer and so draw a pension for longer.

2. The state pension makes up a more important part of poorer pensioners' income and so if the state pension age is raised then these individuals have to defer their retirement since, unlike more affluent people, they cannot afford to be without the state pension.

According to the Office for National Statistics, a 65 year old man in Manchester has an average future life expectancy of less than 16 years. But a 65 year old man in relatively affluent Harrow in Middlesex can expect to live for another 21 years, nearly a third longer than the Mancunian.

Looking at the proportion of pensioners' total income that comes from the state pension, it is probably not the very poorest who would come off worst in raising the state pension age. For the poorest 10% of the population, state benefits make up nearly 55% of gross income in non-retired households and over 75% of gross income for retired households. So, as one would expect, the state provides a significant portion of income whether before or after state pension age.

However, look at the next two 10% slices of the population (the two next 10% groups of the population sitting just above the poorest 10%), who have average gross household income around £12,500 to £19,000 per year when working and around £11,500 to £16,000 per year when retired, then the picture changes. State benefits provide around 40% and 30% of gross income for non-retired households respectively, but a much more significant 75% of gross income for retired households in those categories. If the state pension age is raised then these households are unlikely to be able to retire until the increased age because of how important the state pension is as part of their total pension income.

In contrast, the most affluent 10% of households, with annual income of more than £52,000 before retirement and more than £34,000 after retirement, rely on the state pension for barely 17% of their retirement income and so are less affected by the change in state pension age.

With the state pension underpinned by a generous 'triple lock', and steadily increasing restrictions on the tax limits for company and personal pension schemes, the state pension looks like remaining the most significant source of income for many people. Their retirement plans will increasingly be set in Whitehall by those deciding on state pension age rather than by the individuals themselves.

Tim Sexton is a director in our Pensions team. You can contact him on +44 (0) 20 721 23943 or by email at [email protected]

We’ll be giving our insights on the impact of the Chancellor’s Autumn Statement in tomorrow’s live webcast at 1.30pm on Friday 6 December.

You can watch the webcast here.

For our full commentary and analysis on the Autumn Statement visit www.pwc.co.uk/autumnstatement