Happy 70th birthday, state pension... though it's a muted celebration

5 July 2018

Today marks the 70th birthday of the basic state pension.

Before 5 July 1948, contributory ‘old age pensions’ were paid under the Widow's, Orphan's and Contributory Old Age Pensions Act of 1925. However, recipients were mainly manual workers.

The new system, built on national insurance contributions, was set out initially in the 1942 Beveridge Report and then established by the National Insurance Act of 1946.

Now the state pension accounts for 43% of income in retirement for the average pensioner, followed by occupational pensions (30%), earnings (16%) and other income (11%).

Research by Aviva reveals that 80% of pensioners view the state pension as important to their retirement finances, with a third of these retirees saying that they would be unable to cover basic living costs without the state pension.

In 1948, there were around 5 million people in the UK aged 65-plus. Today, there are nearly 12 million over-65s. By 2116, the number of those aged over 65 is expected to be 26 million – representing 30% of the UK’s population.

 Alistair McQueen, head of savings & retirement at Aviva, says: “Since 1948 the state pension has been providing a universal foundation in retirement, but it is no more than a foundation. We need to encourage more of us to save more for our later life.

“Automatic enrolment has brought nine million more people into workplace pensions since 2012. This is fantastic, but the minimum savings levels are insufficient to provide people with the level of retirement they want. 

“Aviva believes that the minimum contribution should be increased from 8% to 12% of earnings by 2028. Failing to do so could result in disappointment in retirement for millions in the years to come.

“It’s a big challenge, but one that we need to rise to – as our predecessors did in July 1948.”

Meanwhile, Moira O’Neill, head of personal finance at Interactive Investor (Moneywise’s parent company) is not rejoicing this 70thbirthday.

She says: “I find it hard to celebrate this anniversary because I feel obliged to highlight the importance of not relying on the UK state pension.

“In December 2017, we heard from the Organisation for Economic Co-operation and Development (OECD) that the UK’s state pension is the least generous among advanced economies.

“Earlier this year, it was revealed that the balance of a fund that pays the state pension is expected to “fall rapidly to zero around 2032”, according to the Government Actuary’s Department (GAD).

“This could mean workers under age 50 face paying more out of their income to maintain the state pension.

Future generations can expect some serious watering down of the state pension. It may not be paid until you are 70 or even 75. Or it might be much less than it is now.

“Some people talk about the ‘fund’ that they’ve already built up in state pension. 

Well, I’m sorry to break it to you, but there is no actual ‘personal’ fund that you’re owed. The money that you pay in goes out to pay for people’s pensions today, so millennials are paying for their grandparents’ pensions.

“Your NICs simply build up entitlements to whatever is on offer when you come to retire. And that might be a lot less than the meagre offering of today. Many people are surprised to learn that the average state pension today is only just over £7,000 per year.

Ms O’Neill’s advice to people working towards a pension now is to pursue other avenues to retirement comfort, including workplace pensions. 

She adds: “If you are self-employed, don't work, or want to supplement your workplace scheme, a self-invested personal pension is a sensible way to save for retirement.”

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