Employers should be aware of the long-term impact changes to the state pension age could have on their workforce, experts today warned, as the government’s incremental increases for men and women came into effect for the first time.
Under the change, the age at which an individual can begin claiming their state pension has increased in three-month brackets depending on their date of birth. Those closest to retirement have seen the smallest increase, while younger workers can now expect to wait until they are 68 before they can claim.
While women have been subject to state pension age increases since April 2010 – after the Pensions Act 2011 brought their pension age up from 60 to 65, in line with men – this will be the increase for men since the current system was introduced in 1948.
Nathan Long, senior analyst at Hargreaves Lansdown, told People Management employees would only see small changes to begin with.
“People who are aged 58 today will have a retirement age of 66, and that will range down to people under the age of 40, who will have a retirement age of 68,” he said.
“The main impact on employers will be the impact of the slow march to ever-higher state pension ages – so that while people who are close to retirement will only see a slight delay before they can claim their pension, people who are younger will have to wait until they are much older.”
Younger members of the workforce will be more affected by the increases than workers who are currently close to their retirement age, Long warned, adding that organisations should be conscious of the knock-on impact this could have on workers.
“Currently, a lot of people who continue to save money past their default pension age do so by choice, because they want to be in work,” he said.
“What we could see change in the next 10 years is people working past their state pension age because they can’t afford to retire, which could have a significant negative impact on workplace morale. If people want to be in the workforce, that’s one thing, but if they can’t afford to finish it’s a different kettle of fish.”
Tom Selby, senior analyst at pension provider AJ Bell, also warned the short-term impact on individuals’ finances could be ‘significant’.
“At the lower end, a three-month rise in the state pension age could cost someone more than £2,000 in retirement income. Those who have to wait a full year longer could miss out on over £8,000 in state pension,” he said.
The news follows an announcement from the Department for Work and Pensions (DWP) earlier this week that the threshold for pension auto-enrolment will be frozen at £10,000 from 2019 to 2020. Under current legislation, the rate at which individuals begin paying into a workplace pension is £10,000 while the personal allowance for income tax is £11,850 – which will rise to £12,500 in the coming year.
Workers who currently fall between these two tax thresholds will only receive tax relief on their pension contributions depending on whether they are enrolled in a ‘relief at source’ or ‘net pay arrangement’ pension scheme.
“The gap between the point at which people are enrolled into a pension and the point at which they start paying tax will become a chasm in 2019,” warned Steve Webb, director of policy at Royal London.
“This means hundreds of thousands more workers will find that whether or not they get tax relief will depend on the lottery of what pension arrangement their employer has chosen for them. ”
The latest estimates from HMRC suggest around 1.22m workers may be affected by the measure.