The shocking truth about the State Pension

Millions of people could be sleepwalking into pension poverty and it’s not their fault. Are you one of them?

Kevin Godbold

I’m an investment writer and investor focusing on the London stock market. I run my own pension fund and ISA accounts after a career in management and engineering, which included building up a business from scratch and selling it a few years later.

Published 1 July, 2019 12:58 pm BST

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Previous generations relied on the state to look after them with a pension when they retired.

Many worked most of their adult lives and paid national insurance contributions. The reward was a pension at 65 for men and at 60 for women.

The state pension is under attack

However, things changed and the State Pension is under attack. The main problem driving State-Pension austerity is that the proportion of older, retirement-age individuals is increasing compared to the proportion of people in work.

According to Citywire last year, the Government Actuary’s Department (GAD) said in a report that the National Insurance (NI) fund will be emptied by 2032 unless something is done. The NI fund pays benefits including the State Pension on a pay-as-you-go basis.

The GAD report said: “If the system is to continue to cover the current form of State Pension and other benefits, then either the fund’s income has to rise or expenditure has to be controlled.”

The government faces stark choices. For the NI fund to sustain the pension in the coming years, the Treasury must either “commit more funds from elsewhere, increase the State Pension age, reduce the value of the State Pension or hike NI contributions.”

The government has already been increasing the pension age. As I mentioned earlier, not long ago, men got their pension at 65 and women at a delightful 60.

Retirement-age creep

I remember in decades past we’d speculate that the retirement age would fall to 60 for men, to achieve equality. The government actually achieved equality by raising the pension age for women so that it was the same as for men – neatly saving millions of pounds of outgoing expenses in the same move!

And the overall pension age has been rising as well. My father got his State Pension at 65, my wife and I must wait until 67 for ours. And people younger than us must wait even longer. You can check your own State Pension age on this link.

The State Pension is something of a moving target. People starting work today must wonder at what age they’ll eventually get theirs. Will it be 68, 69, 70? Or maybe by the time they retire the government will have really ‘gone for it’ with cost-cutting and the pension age will be 75 or 80 by then. Who knows?

Pitiful pension income (and what to do about it)

Even now, it’s probably not worth getting excited about the pension you’re waiting for. It isn’t much at just £168.60 per week. Shockingly, millions of retirees don’t even get that much because they’ve incomplete NI contribution records. In many cases, pensioners with low pension incomes get top-up benefits right now, but will that continue? We’ve already seen in the GAD report how stretched the NI fund is for all benefits.

We could all be heading for an uncertain financial retirement unless we build up a second pot of savings for ourselves, which we can use to supplement our State-Pension income. One of the most effective ways to do that is by investing in a company pension if you can, or via shares and share-backed investments held in a Self-Invested Personal Pension (SIPP) or in a Stocks and Shares ISA.