State pensions are under pressure and they are creaking under the strain. The new coalition government has begun to address the problem but is it too little, too late?
In 1948, when the state pension was introduced, the average life expectancy of a man was a little over 66 years. That meant that the state pension was received for just over a year by an “average” man before he joined the great ration queue in the sky. Women fared much better, not only did they get to collect their state pension from 60 but their average life expectancy was 72. 

Fast forward more than 70 years to the present day. The life expectancy for those people who were 65 in 2009 has risen to 86.1 years for men and 88.8 years for women.  This represents a huge increase in the cost of funding state pensions – a cost that was not envisaged back in 1948.  An estimate by the Department for Work and Pensions predicts 10 million of Britain’s current residents will live to be at least 100.  That’s 17% of the UK’s current population.  The report goes on to suggest that by 2066 there will be over 500,000 people over 100 with a staggering 7,700 over 110.  There are currently 11,800 people over 100 in the UK today. 

What is clear is that the state funding of pensions cannot continue in its current form.  There are three ways that this burden might be lessened. 

• Auto-enrolment & NEST
  The Government is building on the initiatives of the previous administration, by implementing auto-enrolment.  This will require all employees to be enrolled in a work place pension scheme automatically. In addition employees will be required to contribute at least 5% and employers at least 3% when the new work place pension rules come into force in October 2012.  For those employers who do not currently offer a workplace pension they can enrol their employees in NEST (National Employment Savings Trust) which is a government sponsored pension scheme.

In my opinion the Government has not gone as far as they should. Under the new pension rules employees can elect to opt out of auto-enrolment.  For those that do opt out they will remain reliant on the state pension for the rest of their days. Although opted out employees must be re-enrolled every three years which is going to be an administrative burden falling on employers. Alternative legislation could have mandated both employee and employer to contribute. 

• Increase State Benefit Age (SPA)
  Increases to state pension age for both men and women had already been placed on the statute books under the Labour Government.  The coalition Government has brought some of these deadlines forward.  The state pension age (SPA) for women is currently increasing to 65 by November 2018.  From December 2018 SPA is increasing so that from April 2020 the SPA will be 66.  Scheduled increases in SPA to 67 by 2036 and to 68 by 2046 will almost certainly be brought forward. Further increases to SPA will surely follow. 
•  Make your own provision
  There is only one way to ensure that any changes to the state pension have as little impact on your retirement as possible.  That is to make your own provision for income in retirement.  This can be achieved by detailed financial planning – making the most efficient use of your current resources in planning for the future.

We complete a cash flow modelling exercise for all our clients. The projection shows what future cash flows might look like, what your current provisions will provide you with and how reliant you are on investment returns to achieve your financial goals.  We can also demonstrate the effect that the death of yourself or a partner can have on income both before and after retirement. Becoming a widow in retirement can have a huge impact on retirement income if this eventuality is not planned for. We plan for longevity as standard.  All our financial plans assume a life expectancy of at least 100. At least our clients are unlikely to be surprised by running out of money before they receive their telegram from the Queen!

If you would like to find out how Proposito Financial Planning we can help you achieve the retirement you’ve always wanted  you can call us on 0845 345 3536 or send us an email at info@proposito.co.uk