It’s widely understood by Advisers in the Financial Services sector that the public at large have only a limited understanding of their State Pension entitlement.
But the results of a recent survey by Money Alive are pretty staggering nevertheless.
Money Alive asked a series of questions around State Pension entitlement, garnering 174 responses from 50 to 60 year olds. When asked to select the state pension age with options from 62 to 69, the responses split in just about every direction. For men, the most frequently selected answer was age 67, which was chosen by just under 39% of respondents. Around 31% selected 65 and just under 13% selected age 66; the correct answer. In archery terms, you might call that reasonable grouping but when it comes to retirement planning, it’s far from an ideal starting point.
For women, 4 in ten opted for age 65, just shy of 27% for 67, a troubling 12% selected age 62, while only a mere 10% got the answer spot on. This likely reflects the impact of recent increases and equalisation of the retirement age with men.
It’s almost 50:50 when asking respondents whether the retirement age is now the same for women as it is for men.
The apparent lack of understanding is perhaps to be expected with the amount of recent change. With equalisation in force since 2018, an increase in the age to 66 last year, and plans for this to increase to 67 later this decade, a further increase planned to 68 in the late 2030s, there’s a lot for the public to keep up with.
People may be accurately identifying their own retirement date (on current government plans and obviously subject to change!), but frankly we doubt that. Perhaps it really is a case of “Confused? They should be.”
It’s a state of affairs to quicken the pulse of any financial planner. Just under 39% put the pension at between £150 and £200 - the correct range - while almost the same number of 40% place it between £100 and £150 a week, perhaps reflecting a degree of pessimism about government generosity.
It will hardly come as a surprise to advisers that there are also serious underestimates regarding the capital sum you would need to buy a level of income matching the state pension, which is north of £300,000 at today’s annuity prices. To highlight just one statistic, 34% suggested that to buy an income for a woman matching the state pension would cost between £50,000 to £100,000.
It is probably safe to say that some people seeking to turn a small private pension into a regular, dependable income could be in for something of a rude awakening. We do have to caveat that a little – full state pension entitlement can of course lay an important foundation for low earners when framed in terms of replacement income.
While you might expect some of those in retirement to understand the triple lock perhaps it is a little much to expect most people to know why and when the three possible elements of the lock, CPI inflation, average earnings or 2.5% apply. Therefore, the 64% who think a 1% increase in inflation means an increase in the state pension of 1% could be forgiven. Finally, 53% know that you can defer the state pension. Advisers may disagree but that strikes me as a reasonable figure. Of course, it is hardly surprising that with such relatively low public knowledge, the state pension attracts more than its fair share of controversy.
The system has been simplified in comparison to previous iterations, a process dating to around 2010, but it is the gradual equalisation and rise in the pension age, begun by Labour and accelerated during the Conservative and Lib Dem coalition years that has led to campaigns and high court challenges and a great deal of bitterness. Crucially at the heart of the campaigns was the assertion that a big cohort of women born in the 1950s were not aware of the changes to their retirement ages.
Although none of these challenges have been successful, there is clearly a huge awareness gap that the last decade of change has only exacerbated. There are big implications for society and the economy as well. In addition, not everyone will receive the full state pension.
This report from late 2019 in the Independent which reported on DWP figures showing that of the 1.1 million people receiving the new pension just 44% were receiving the full amount.
‘Forewarned is forearmed’ is a much used cliché in pension terms, but it is pretty obvious that knowledge about the years of contributions required to get the full amount of state pension might help people make more informed career decisions earlier in their working lives. People who use the services of an adviser should be in a much better position, something which advisers have to contend with in their financial planning and perhaps their communications more generally. An understanding of someone’s state pension entitlement is an important part of foundational retirement planning. Among other things, advisers know it is a vital underpin that would cost a huge amount of money to replicate with an annuity or (with more risk) an investment portfolio.
Analysis by Aegon in September 2020 found that to buy an annuity paying an income of £175 a week at retirement age and increasing with inflation each year would require a pot of £336,500. Advisers will know that to receive that full amount you need 35 qualifying years. Ten years of NI contributions is the minimum number needed to receive any state pension of just over £50 a week (10/35s of the full amount).
If you have 20 qualifying years on your national insurance record after 6th April 2016, the state pension will be just over £100 a week. In most cases, you will have built up those qualifying years by working and paying national insurance through your employer or as a self-employed person. You can also receive national insurance credits for periods of illness, unemployment and when you are caring for someone. But many people have gaps. For example, you may have spent time caring for someone without realising you were entitled to benefits (and NI credits). You may have not earned enough in a particular year to meet the threshold for paying NI contributions or you may have lived abroad. All of these scenarios can lead to missing years but you can make this up by ‘buying more years’.
If someone missed last year, i.e. 2020⁄21, the cost is £15.30 a week for class 3 contributions so about £795.60 according to the Pensions Advisory Service. Each year of additional NI then means you get about £244 a year more in state pension. Depending on an individual’s entitlement, the state pension needs to be taken into account in assessments of someone’s overall wealth as part of retirement planning and arguably even more so when they are taking more radical action such as undertaking a DB transfer. In fact, it doesn’t hurt to underline the point.
Money Alive regulatory lawyer and legal adviser Damien McPhun of City of London lawyers Beale and Company says: “The FCA is very clear that advice around retirement options including with potential DB and other pension transfers has to be based on a clear understanding of the client’s anticipated expenditure in retirement and their likely income. I have sat in various FCA supervision and enforcement meetings with clients where the FCA have said a firm cannot give suitable advice or should not have made a recommendation without knowing and factoring in the details of the client’s state pension and their partner’s pension in terms of when and how much!”
Of course, outside of the details of planning, advisers can also set themselves up as a trusted source of information for clients who can beef up their own knowledge and use it to inform discussions with their friends and families. We know that some advisers also like to play a role in helping educate the public more broadly. And while you wouldn’t expect most people to really understand the details of complex subjects such as long term care or pension transfers, this survey underlines the point that it is wise not to assume more basic knowledge.
If you think the information is easily accessed, a quick Google can show you how confusing things can be particularly when it comes to shifting state pension ages. The information is there and some places - Which? for example - do a good job. But it helps to know what you are looking for in the first place. One final point – I think the government seriously needs to think about a public awareness campaign. A basic awareness of the basic state pension would represent an important first step in encouraging a broader understanding of personal finance.