The Changing Face of the British Pension

Fiduciary Wealth Team

Changes to the structure of British society - with people living considerably longer in the 21st century - have seen the number of senior citizens almost double since Queen Elizabeth II ascended to the throne in 1953.

There are around 13,100 more centenarians than there were 65 years ago, when there were only some 300. On average, we are living almost 10 years longer. This has led to the number of UK pensioners increasing from 6.8 million in 1953 to 12.4 million today - making up 14% of the population, compared with 6% in 1953.

Pension age increase

Due to the changes in the structure of society, with an increasing number of elderly people relying on support from the state, the government introduced changes to the State Pension legislation. The biggest change is increasing the age at which men and women are entitled to receive their State Pension.

The State Pension age of 65 was first set in 1926, when there were nine people of working age for every senior citizen. Today, there are three working people for every pensioner. For this reason, the State Pension age for men and women is increasing to 66 by April 2020. The age is set to rise again to 67 for men and women by 2028.

The pensions system is continually under review and the government is studying further proposals in line with the link between longer lives and the State Pension age. In 2028, a simplified single-tier pension scheme is also being introduced, so people will know exactly what the amount of their State Pension will be.

The changes will also take into account the fact that many people today are still working at the age of 65 - 540,000 men and 350,000 women are still in employment when they are 65 or older. There were less than five million State Pension claimants 65 years ago - today, there are around 11.5 million.

All of these factors have combined to prompt the government's biggest shake-up of the pensions system since it first began.

Defined Contribution schemes

The government has also put in place what it describes as "pension freedoms" for private pensions, although financial experts say this could have disadvantages, as well as advantages. The changes will affect 4.5 million people who have Defined Contribution schemes.

New limits on a pension pot's total size could mean the income from an annuity will be less than expected. Monthly pension savings go into a pot and this is used to buy your retirement income. The pot can be accessed freely by people when they reach the age of 55, although this age is going up to 57 from 2028.

You can withdraw 25% of the pension pot as a lump sum tax free, or you can take out smaller amounts, with the first 25% being tax free every time you make a withdrawal. However, you must pay income tax on any amount you withdraw above the 25% allowance.

Other options, such as buying an annuity or taking income drawdown, have different repercussions on the tax you will pay. Similarly, there are various different options relating to passing on a pension to your dependants.

Under-50s' tax increase

Despite the new measures to cope with the ageing population, government advisers have warned the State Pension fund is set to run out in 2035, unless further action is taken. It has been suggested that people under the age of 50 who are employed will face a tax increase to counter the shortage.

The Government Actuary's Department warned last month that the fund, which uses National Insurance contributions to pay state benefits, is depleted as a result of the ageing population. It currently stands at around £25 billion, but is likely to have all been spent by the mid-2030s.

A percentage of the NI contributions is kept back for the fund reserves, but most of it is spent on paying benefits and pensions in the current financial year. Workers and employers pay into the fund to secure the workers' entitlement to a future State Pension.

If the 5% tax increase for under-50s was implemented, an employee who earned around £28,000 per annum would have to pay an extra £125 annually in tax. For a worker earning £40,000 per year, the tax would rise further and they would pay an extra £190 per annum. However, their State Pension entitlement would not increase as a result.

Workplace Pension

The Workplace Pension scheme was introduced in 2012 and stipulated that in return for employees contributing at least of 1% of their wages to a pension scheme, employers would match the amount. Most savers found they could also benefit from tax relief on their contribution.

Figures released this month have revealed that more than one million UK employers have met their obligation by enrolling in the scheme. The Pensions Regulator hailed the scheme a success and said employers had helped halt the downward trend in employee savings, so that putting wages into a pension scheme had become commonplace.

Retirement planning is potentially the most important of all financial planning and it can also be the most complex. Here at Fiduciary Wealth, our specialist financial planners have an expert understanding of pension legislation in the United Kingdom and throughout Europe.

Our regulated financial planners can advise on every aspect of retirement planning, whether you are resident in the UK, you wish to move abroad, or you are already living overseas. We can compare the benefits and tax advantages of every option, to help you make an informed decision. Please contact us for further details of how we can help you to plan for your retirement.