Jeremy Corbyn wants the UK to have a flexible state retirement age. Michael Klimes weighs the pros and cons
- Calls for a flexible state pension age has been revived This could make the system fairer for sectors of the population with low life expectancy But even its supporters concede it is fraught with difficulties
As the British population ages, the state pension age (SPA) is set to rise significantly. Defenders of this trend argue since people live longer then it is necessary they retire later. They make the point that allowing many people to draw a state pension for more than a third of their life is ultimately unaffordable. Critics contend a higher SPA penalises the lower paid and those in physically demanding jobs, however.
Jeremy Corbyn, who has just been named leader of the Labour Party at the weekend, is in the second camp and has advocated a flexible SPA in The Daily Telegraph.
This week's Pensions Buzz survey revealed a majority of respondents backed the proposal.
Many respondents acknowledged the moral force of Corbyn's reasoning, and others said it was in line with the current government's drive to make private pensions more flexible. Others suggested it was not practical and went against the pension freedoms agenda. Who is right?
Trades Union Congress (TUC) policy officer Tim Sharp says the topic should be considered in when the government reviews the SPA in 2017. "There is no doubt that to keep rapidly ratcheting up the SPA risks leaving many, especially those who due to ill health are unable to keep working in their later years, at risk of a poor standard of living in retirement," he says.
Sharp adds: "We are already seeing evidence that increasing numbers of people in sectors such as the health service are suffering age-related conditions that are forcing them to drop out of the workforce."
The TUC believes the review of the SPA offers the opportunity to return to a consensual approach to making policy in pensions. "We should use this review as a chance to return to the transparent, evidence-based, consensual approach that served us so well with the Pensions Commission and paved the way for automatic-enrolment," Sharp says.
Barnett Waddingham senior consultant Malcolm McLean agrees with Corbyn on the principle of a flexible retirement age yet he differs on the technicalities. The Labour leader's suggestion that certain categories of worker would qualify to get state benefits early would be too complicated and expensive, he says.
McLean explains: "It would also be extremely difficult to determine which types of occupation met the criteria for early retirement payment and even then, given that most people have several different jobs during their working life, which job would count in assessing any entitlement?"
However McLean argues it could work if constructed differently. His suggestion would be to allow an "early retirement" option not in relation to specific occupations but for anyone once they had passed a minimum age. From that point an individual would be allowed to start to draw a state pension reduced by 5.8% for each year of early withdrawal ahead of the official SPA.
This system has a number of advantages, McLean explains: "This percentage reduction is the same figure as the one which will apply to those who delay taking their pension for a year beyond the state pension age," he says.
"In other words the same principle and practice applied in reverse, which as far as I can see would be more or less cost neutral to do. It also brings the state pension in line with what happens in the private sector with actuarially reduced occupational pensions."
McLean says this would complement the changes to private pensions introduced this year. "I don't see any need in any of this to materially change the freedom and choice agenda other than to ensure that the minimum age for accessing a private pension moves up in the same proportion as the official SPA does and maintains the ten year differential between the two."
Hargreaves Lansdown head of pensions Tom McPhail says Corbyn is right about there being inequalities and says the concept of a retirement date is increasingly outdated. "Just about every client I have spoken to in recent months now sees retirement as a transition rather than an event; for many the process of moving from work progressively into retirement is one that could take ten or even 20 years," he says.
But he warns it is extremely challenging to devise a system which adequately compensates for the inequalities Corbyn criticises. Any such remedy would either be extremely bureaucratic or force the state to crystallise unfunded state pension liabilities by buying them out via an underwritten annuity.
For McPhail the critical challenge is to foster the sense of individual responsibility and engagement early in people's working lives. Everyone should be able to plan ahead as to when and how they will retire. "Rather than retirement we should start thinking in terms of ‘third age' and ‘third age savings' rather than a pension," he says.
The French example
In France the default retirement age for people born after 1955 is 67. At this age retirees receive a state pension of 50% of their average lifetime earnings.
But workers can start drawing their pension at a reduced rate up to five years before they reach retirement age. The minimum pension is 37.5% average earnings.
Workers who have been exposed to tough working conditions over a portion of their working life can retire up to two years earlier without any reduction. People who entered the workforce early can also retire early with an unreduced pension.
This option is open to anyone who has 166 quarters of contributions, equivalent to 41.5 years in work, meaning someone who started work in their teens can draw a full pension starting in their late fifties.
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