Out-Law News | 29 Apr 2014 | 1:14 pm | 3 min. read
Raj Mody, head of pensions at the professional services firm, said the findings showed the need for a more flexible state pension system in order to complement upcoming reforms to occupational pensions, as announced last month by Chancellor of the Exchequer George Osborne. 80% of the 2,000 UK adults surveyed by PwC said that they hoped to retire before 67, the planned state pension age by 2028; while 47% of those who wanted more flexibility over their retirement age would be prepared to take a cut in their state pension entitlement in order to do so.
"It is clear a one size fits all state pension age does not work anymore," Mody said. "A more flexible state pension system will place retirement decisions firmly back in the hands of workers and companies."
"The current policy of gradually increasing a single state pension age focuses on overall life expectancy, but doesn't take account of variations for different socio-economic groups and regions. Rather than prescribing when people can access their state pension, people should be allowed a degree of choice based on their individual circumstances," he said.
PwC's preferred option would see the government introduce a state pension 'window' rather than a single state pension age; allowing people to choose when they receive their state pension between a range of ages and receive an adjusted amount for the life of their pension based on their chosen start date. This approach could ultimately produce "significant savings and greater sustainability of costs" in the long term, particularly if life expectancy was to increase dramatically in some areas, Mody said.
The state pension age (SPA) for women in the UK is due to rise from 60 to 65 to match that of men from 2018, before it increases to 66 for both sexes in October 2020 and to 67 by 2028. The Pensions Bill, which is currently awaiting Royal Assent, contains provisions which would allow the government to carry out a review of the SPA every five years to ensure that the system is sustainable as life expectancies rise. This mechanism is expected to be based on the average UK adult spending one third of his or her life in retirement.
A new flat rate single tier state pension, set above the means test and based on 35 years of National Insurance contributions (NICs) is due to replace the current system from April 2017. In addition, changes announced as part of the 2014 Budget would give members of workplace defined contribution (DC) pension schemes more freedom to access their pension savings from the age of 55 without having to buy an annuity, or facing heavy tax penalties, from 2015.
PwC said that its proposed 'state pension window' approach would extend the same flexibility that the government intended to introduce for workplace pensions to the state pension system. Its research found that only 9% of people said that the age at which they receive their state pension, which tends to form a significant proportion of their retirement income, has no impact on the age at which they decide to retire.
The main reason that people would choose to receive a lower state pension amount earlier is to allow them to reduce their hours or give up work, according to PwC; with just under half of survey respondents saying that they wanted to reduce their hours in order to pursue other interests and over a third wanting to spend more time with their families. In addition, more than one in five respondents said that their job was too demanding to allow them to carry on working until they reached the SPA.
"With the government's outlined rises to the SPA, people's hopes of retiring as early as they originally planned are unlikely to remain a reality for many," said Jon Andrews, PwC's head of HR consulting. "Introducing more flexibility into the state pension system simply reflects the working environment where many employers encourage, and employees benefit from, flexible and part-time working ... A state pension window gives people and companies much more control in their retirement planning and removes any nasty surprises."
He added that PwC's proposals would also benefit those who wanted to continue working, allowing them to benefit from taking their state pension later. 19% of the respondents to the survey said that ideally they would defer their state pension in order to get a bigger sum later, or because they could not afford to retire at that age.