Opinion: Is the pension ‘triple lock’ under threat?
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Perhaps the most powerful illustration of the degree to which life improved over the past century is reflected in official life expectancy figures.
According to the Office for National Statistics, in 1901, average male life expectancy was 45; females tended to live four years’ longer. By 2019, however, males could expect to live until the age of 79.9 years, while females had a life expectancy of 83.6 years.
A combination of significant medical advances, consistent improvements in food quality, housing and education, coupled with dramatic environmental progress, account for the striking increase in life expectancy.
Where once our grandparents delighted in reaching the official retirement age of 65 and drawing a state pension – introduced in 1909 – today’s retiree justifiably plans for a comparatively lengthy post-work life of up to 25-30 years.
Yet alongside the twentieth century’s spectacular advances came a series of structural social challenges that are easy to understand but incredibly difficult to resolve to everyone’s satisfaction.
Official statistics show that in 2012, the percentage of adults aged 65 and above was 17%, a figure projected to rise to 24% by 2050. Conversely, as the proportion of adults reaching retirement age grows, the number of working age people has stagnated as the UK’s birth rate has dropped.
This brings us to a simple but important statistical relationship known as the ‘old age support ratio’ which measures the ratio of the population deemed ‘economically inactive’, ie they’re retired, to younger people who are more likely to be economically active, ie they’re in work.
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The tax revenue generated from the latter pays, in part, for the state pensions of the former.
Just after World War II, this ratio was 1:7, in other words, there were seven tax-paying workers to one pensioner. By 1965, the ratio had fallen to 1:5.3 and last year, it had tumbled again, to 1:3.4. By 2050, experts believe the ratio will be 1:2.9.
In normal times, this problem may not be considered so pressing; after all, governments can continue to raise the age at which retirees may claim their state pension or make access to the pension means-tested.
Alternatively, they could raise taxes on private pensions or jettison commitments deemed expensive, such as the ‘triple lock’ which ensures that the state pension rises by the higher of earnings, inflation, or 2.5% every year.
But these are not normal times and next year, the Chancellor will have to find an additional £4 billion with which to fund the triple lock after average annual UK earnings rose to 5.6% in April, an artificial leap boosted by the furlough scheme.
Set against next year’s projected net debt of £2.6 trillion, a ‘mere’ £4 billion may look like chickenfeed, but it seems likely that in order to prevent national debt growing exponentially, measures designed to curtail government expenditure will soon be implemented.
Abandoning the triple lock, or effectively taxing private pensions by cutting the lifetime allowance or reducing the tax relief on contributions are among the possible money-saving measures being considered.
For people close to retirement or those who have already retired, the impact of these measures upon their regular income could be devastating.
Mindful that government borrowings must be repaid at some point, a sizeable number of older people are already exploring a variety of ways by which they could supplement their later-life incomes. For many aged 55 and over, one of the most attractive options is to release a proportion of the equity built up in their homes, still a tax-free alternative.
The most popular method of releasing equity is to use a lifetime mortgage secured against the homeowner’s property.
Unlike a ‘regular’ mortgage, which most people use to buy their home, a lifetime mortgage features no end date. Instead, it runs for the duration of the homeowner’s life (and that of their spouse), or until they both enter permanent, long-term care. At this point, the property is sold and the proceeds used to pay off the initial lump sum and any accrued interest.
As many lifetime mortgages do not require any monthly payments, older homeowners could be sitting on the answer to any future pension squeeze.
Moreover, the money released can (once any existing debt secured against the property is cleared) be used for anything the homeowner wishes. For most people, this means improving their quality of life with home renovations, or reducing worry by giving their finances a necessary boost.
A lifetime mortgage may affect the homeowner’s estate value and entitlement to means-tested benefits, which is why it is worth getting a personalised illustration from a qualified financial adviser in order that the risks and other characteristics of equity release are fully understood.
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