The government’s plan to create a formula linking the state pension age (SPA) to life expectancy has been called into question, with experts predicting falling longevity will not lead to earlier SPA eligibility.
The state pension age is set to rise over the next 25 years and a review is expected in early 2023, according to the government. The review next year will examine whether the timeframe that was previously established is sustainable by looking at relevant data including life expectancy.
But the government’s plan to link the state pension age to life expectancy has been called into question as current data shows a decline in life expectancy, which would suggest that state pension age, according to the formula, should be lowered.
WTW senior consultant David Robbins says: “The way the government talks about the review is revealing – it says it will ‘need to carefully balance important factors, including fiscal sustainability, the economic context, the latest life expectancy data and fairness both to pensioners and taxpayers’.
“This is a strong hint, if one were needed, that the government has no intention of allowing the rise to 68 by 2039 to slip back just because its formula for linking state pension age to longevity would now point to a much slower rise. If anything, with more than 800,000 people expected to reach state pension age each year in the early 2030s, it may be looking to bring the change forward.
“The rise to 67 by 2028 is overwhelmingly likely to be seen as a done deal, even though people retiring in that year are now expected to live almost three years less long, on average, than they were when the policy was set.”
The Pensions Act of 2014 included dates for the rise in the state pension age from 66 to 67. The most recent ONS life expectancy estimates at the time were those based on data from 2012. According to them, UK males aged 67 in 2028 will live an additional 21.3 years on average, compared to 23.8 years for women. The most recent ONS predictions (based on 2020 data) indicate that males aged 67 in 2028 will live an additional 18.7 years on average and women an additional 20.8 years. The difference, or a little less than three years total, is therefore 2.6 years for males and 3.0 years for women.
These figures, or “cohort life expectancies,” are what the government considers when determining the state pension age. This indicates that they make predictions about how death rates will evolve in the future, and the ONS currently makes more pessimistic predictions than it did previously.
Robbins added: “Office for Budget Responsibility forecasts suggest that next April’s 10.1 per cent state pension uprating will be the first of five in which the Triple Lock delivers bigger increases than the earnings-based increases required by legislation.
“The question is whether the Triple Lock survives that long. In telling pensioners that ‘now and always, this government is on your side’, Jeremey Hunt may have been preparing to reaffirm commitment to the Triple Lock, but he left himself some room for manoeuvre. One option would be to pivot to a modified version of the policy where pensions track earnings over the long term but get a temporary boost when prices are rising faster.
“When the New State Pension (NSP) was introduced for people reaching state pension age from April 2016, the full NSP consumed 74 per cent of a pensioner’s personal tax allowance. Next year, the NSP will use up 84 per cent of the personal allowance, and that will rise to 97 per cent in 2027/28 if the tax allowance remains frozen while the NSP rises with the Triple Lock as forecast by the Office for Budget Responsibility.
“This reduces the end-to-end tax advantage from pension saving, especially as some individuals’ State Pension entitlements exceed the full NSP; beyond the 25 per cent lump sum, many retirees will have little if any scope to draw tax-free income from their private pensions.”