Pensions World

Pensions Act 2011 and state pension age

The Pensions Act 2011 received royal assent on 3 November 2011 following extended parliamentary debate and some modifications from the original Bill. The Act amends the timetable for increasing the state pension age (SPA) to 66, so that the increase will occur faster than previously set out in legislation. These provisions were amended as the Pensions Bill progressed through Parliament as the changes were seen to have a disproportionate impact on women in their late 50s who would see a two year increase to their SPA. Opponents argued for a longer delay to the scheduled timetable than the resulting six month concession, but the cost of delaying the SPA further was believed to be too high. This element of the Pensions Act comes in to force on 3 January 2012.

Where are we now?

SPA is the earliest age at which an individual can claim state pension and certain other concessionary benefits. It was traditionally 65 for men and 60 for women. The Pensions Act 1995 introduced an equalised SPA of 65 for men and women, in accordance with the EU Equal Treatment Directive. SPA for women began gradually rising from April 2010, so that by 2020 it was due to be aligned for men and women at 65. However, under the Pensions Act 2011 the women’s SPA will reach 65 by November 2018.

There were then plans for further increases – set out in the Pensions Act 2007 – so that SPA would reach 68 for both sexes by 2046. The initial increase to 66 was originally due to take place between 2024 and 2026. However, in light of improvements to life expectancy projections and pressures on public finances, the government has moved this increase forward by six years. The SPA for both men and women will begin to rise from 65 in December 2018 to reach 66 by October 2020.

As things stand, women born before 6 April 1950 and men born before 6 December 1953 will retain the traditional SPAs of 60 and 65 respectively. Anyone born on or after 6 October 1954 but before 6 April 1968 will now reach SPA on their 66th birthday. For those with dates in between, it becomes more complicated as SPA is determined by date of birth rather than age.

Future increases beyond age 66

The Pensions Act 2007 provides for SPA to rise to 67 (between 2034 and 2036) and eventually to 68 (between 2044 and 2046). In his Autumn Statement, the Chancellor announced that SPA will in fact rise to 67 between April 2026 and April 2028. The government is considering the timetable for the increase to 68 and it is likely that this will be revised to keep increases in line with life expectancy.

In its 2010 Green Paper – A state pension for the 21st century – the government sought views on the appropriate mechanism for future increases in SPA to reflect increasing longevity, possibly through the use of a formula, or by reviews at regular, pre-determined intervals. The government has yet to respond to this consultation.

Implications

Reaching SPA does not mean that an individual has to draw their state pension and many people already defer it (usually with compensation, in the form of a lump sum unless the member chooses an increased pension) and continue to work. On reaching SPA, individuals are entitled to not only the basic state pension, but also benefits relating to income and savings and some concessionary benefits. The change to SPA means that the entitlement age for such benefits can also be impacted.

Pension schemes that pay bridging pensions to SPA, or apply a state pension offset, need to take account of the changes. The age from which guaranteed minimum pensions are payable is not affected.

It is widely accepted that SPA needs to increase to ensure that it is affordable, but there is less agreement about how quickly this should be done, considering issues such as giving sufficient notice to affected people and the amount of retirement time that might be spent in good health. Women are most likely to be affected by the changes and should take this into account as they may need to work for longer to provide an adequate retirement income.