Women affected by the increase in state pension age from 63 to 66 could have the impact offset by being allowed to draw their pension early on an actuarially neutral basis, a DWP Select Committee report has proposed.
The report, which highlights the very substantial costs involved in any form of redress that reverses the impact of any of the state pension age increases, suggests the affected women, born in the early and mid 1950s, should be allowed to receive their state pension earlier at a lower, actuarially neutral rate.
The report, in response to a concerted campaign by the WASPI pressure group, comes days after John Cridland CBE was appointed to lead a review of state pension age. The select committee report argues there is a strong case for differences in life expectancy across the UK to be reflected in state pension age.
The report points to a high level of media coverage of the equalisation of state pension age, with 600 articles covering the issue between 1993 and 2006, an average of around one article a week.
The report cites the example:
A woman born on 6 January 1955 is scheduled to reach state pension age on 6 January 2021, aged 66. If she chose to take her state pension 9 months earlier on 6 April 2020: If she would otherwise have qualified for the full new state pension of £155.65, she would receive £149.58 per week in 2016–17, a reduction of £6.07. If she would otherwise have qualified for a new state pension of £119.30,(A) she would receive £114.65 per week in 2016–17, a reduction of £4.65.
The DWP Select Committee report says: “We were interested in an idea that was proposed of permitting early retirement, from a specified age and for a defined cohort of women, on an actuarially neutral basis. This arrangement, which features in some defined benefit occupational pension schemes, would permit women in that specified age group to choose to take a state pension sooner than scheduled in return for lower weekly payments for the duration of their retirements. The actuarial reduction factor used should ensure that, on average, over the lifetimes of the pensioners concerned, there would be no additional pension costs to the exchequer.
“There are several questions which would need to be addressed before such an idea could be progressed. The details and limits of eligibility, and the rationale for this relative to those earlier or later, would need to be determined, including the position of men at 65. It would bring forward some public spending, as an unknown number of women would take their state pension early. This would increase public sector net borrowing in the short term in return for a longer term reduction. The total fiscal impact would not be known until all the relevant pensions ceased to be paid.”
Hargreaves Lansdown head of retirement policy Tom McPhail says: “The clock is ticking, with more women passing their originally expected state pension age every day, so if the government is going to act, it should do so as quickly as possible. This would be an effective compromise, allowing those women who have been affected by the increase in state pension age the option to draw on their state pension at the time they originally expected, albeit at a reduced rate. Politically this could be quite attractive as it would show the government is listening and is sympathetic, without it actually having to cost any money. This could also pave the way for everyone to have a more flexible state retirement age in due course. There is no reason why the Chancellor could not announce in the Budget tomorrow plans to explore this option further. There would be a short term cost as it would bring forward some public spending so it would be important to look very closely at how the reductions to the state pension rate might be applied.”
Aegon pensions director Steven Cameron says: “Last year the Chancellor revolutionised retirement choices by offering all those with a private ‘defined contribution’ pension vastly increased flexibility around when and how much they could take from their pension. This pro-choice move has been widely and warmly welcomed. The next logical step would be to offer new flexible choices within the new state pension.
“The improvements we are seeing in life expectancy mean the ‘default’ state pension age will inevitably continue to increase, to avoid placing increasing burdens on those of working age to support state pensioners. But while average life expectancy is increasing, ‘healthy’ life expectancy is much more varied, and working to more advanced ages may not be feasible for all based on health or the challenges of a particular job. This means further increases in state pension age have to be accompanied by flexibility for individuals to decide to take a reduced amount from an earlier age.
“There are knock-on considerations to explore. The Government won’t want to be seen to encourage people to leave the workplace earlier than they need to. Allowing state pensions to be taken earlier also brings forward state pension payouts, for the Chancellor, although over time the terms could be set to make sure this balances out. Implications on entitlements to means tested benefits also need thought through. These points of detail should now be investigated but this shouldn’t stand in the way of what would be a welcome pro-choice policy measure and also a potentially powerful vote winner.”