Today I wanted to have a look at the state pension.
Now this will affect us whether we're starting out in our careers,
we're reaching the end of our retirement or we've even actually retired.
So I've been looking through some historic documents that set out
how the state pension was defined and evolved in the UK
and also some forward-looking documents on how the state pension could potentially change in the coming years.
So I'll go back to the early 1900s where the state pension was being tested
all the way through to the introduction of the triple lock.
Now the triple lock generates some really interesting implications for the future of the state pension.
Well let's go back to 1909 when the very first state pension was introduced
and back then it was called the old age pension.
It was actually called that back in the 70s as I recall as well.
So we're going back to a time when phones weren't a thing and electricity was barely used
and the average life expectancy was only 52.
And if you did make it much past 52 you were generally going to be facing real financial hardship
and that's where the state pension came in.
It didn't actually kick in until you were over 70 though
and it wasn't a universal system like we have today.
It was actually means tested and back at the time the amount that was paid was either
five shillings per week for a single individual or seven shillings and sixpence for a married couple.
So to put that into perspective today for a single person that'd be about 21 pounds per week
and that's a far cry from what we think is a livable pension today.
This does put a spotlight though on how we live today and our expectations
and what they are compared to what they were back then.
And this was quite a groundbreaking step at the time
but it's an important lifeline for those who'd work their whole lives but no longer support themselves.
It set the stage for everything that followed in the world first state.
If the UK was ever going to modernize and industrialize
then the pension system needed to kick in and keep up.
The UK became reliant on its population to drive the economy.
So 16 years later and in 1925 the contributory pension came into force
and this included manual workers.
It was seen as recognition of their valuable role to society and the economy as a whole
and this broadened pensions to not just be for the few but actually for everyone in the country.
And what's important here is the start of the contributory system.
So you made contributions and you were entitled to a pension when you reached retirement age.
So this laid down the groundwork for the pension system that we know and understand today.
So everyone contributed and everyone was entitled to benefits at the end
and this was a big step towards a more socially stable UK.
So let's fast forward now right up to the 1980s when the pension system really started to face some pressure.
This was when the Social Security Act came into force
and some wide sweeping changes to the way pensions were delivered.
The Act broke the link between average worker earnings and pension payouts
and the government of the day announced that this is a way to stabilize the UK to be able to pay pensions
even when there's economic difficulties in the country.
If wages were still rising, pensions would rise generally too.
But during economic downtimes, pensions could actually reduce.
So this was really intended to protect pensions from economic swings.
Now the pension reforms didn't stop there.
So between 1995 and 2018, there were significant changes to the pension.
These pension Acts were focused on aligning the pension age for women and men
and the outcome of this was a shared pension age of 66, a big step towards equality in the pension systems.
But this didn't come easily and it wasn't without controversy,
particularly for women who planned their retirement based on the old system.
We now refer to this as the Waspie Women.
And at this point, the second state pension or the S2P was introduced.
So in 2002, this pension was designed to provide support for those with care responsibilities or some disabilities.
So acted really as a safety net within the safety net for those who couldn't make the required national insurance contributions to normal work.
And S2P was seen at the time as a fairer way to make sure that everyone benefited from the state pension.
So now we've seen the state pension change from very basic means system into a contributory system that we know today.
But things didn't stop there.
There's significant pressure on the pension systems now due to demographic shifts.
The biggest of the changes that was introduced was the triple lock.
So the triple lock was brought in in 2011.
It guarantees that the state pension will increase every year by at least two and a half percent.
However, if inflation or average wage growth are higher than two and a half percent,
then it will go up by the higher of the three amounts, hence the name triple lock.
So even at times when inflation is low, pensioners are guaranteed to go up by 2.5 percent.
So over time, it's potentially possible for the value of pensions to rise above inflation.
And this is a powerful guarantee because it means pensioners don't need to worry about their pensions being eroded over time by inflation.
From the perspective of the economy, there's certainly some downside to this because at times when pensions are increasing faster than the economy is growing,
this could put significant pressure on government budgets.
I'm going to look at that in a bit more detail later.
But before we dive into that, there's another major overhaul of UK pensions back in 2016.
This is when the new state pension was introduced.
So the new state pension was a replacement for the old pension plus the S2P, and it was meant to simplify things.
Now, I'm all for simplification and it's generally a good thing, but there are always some losers.
The new state pension introduced a flat rate for everyone dependent on payments up to 35 years worth of national insurance contributions.
So if you lost out when the pension system moved from the old system to the new system, please let us know in the comments.
We'd like to know what your story is.
So let's switch focus to today.
So what are the challenges for the current state pension and where are we headed?
One of the issues that's been getting a lot of attention recently has been the focus on taxing the state pension.
Now, people think of pensions as a reward for working hard during your working life and that taxing this would always be unfair.
Now, in the UK, state pensions are classed as taxable income in the same way earnings from employment are.
So here's where it gets tricky.
The full state pension for this year is £11,502 whilst our personal allowance is frozen at £12,570.
We can see where this is going with the triple lock.
The full state pension amount is creeping closer and closer to that personal allowance amount.
And that's because of the triple lock, which guarantees at least 2.5% per year.
Wage growth at the moment is predicted at 5.7% and state pensions keep rising at this rate.
It's only a matter of time before it catches up with the taxable allowance.
And this means it's inevitable that pensioners would start to pay income tax and maybe for the first time ever in their lives.
And people are already starting to refer to this as a retirement tax.
So what can we do about this?
Well, one option is to raise the personal allowance and always ensure that it keeps ahead of the triple lock for pensions.
And this would go some way to ensuring that pensioners who are on low incomes would avoid being dragged into that tax regime.
Another possible outcome that they could place a cap on the triple lock, but this would erode pensions over time.
Whatever system is dreamt up will need to find a balance between protecting the incomes of pensioners
and making sure that the whole pension system doesn't become unaffordable and collapse.
So this tension between maintaining the triple lock and keeping pensions out of taxation is something that will have to be addressed at some point.
It really can't be ignored.
But if you got thoughts on how we could potentially do this in a more fair way, please let us know in the comments.
It's always important if you are looking to claim your pension soon,
that you do check that you've got the right national insurance contributions and maybe give HMRC a quick call or a check on the HMRC website.
You should be able to validate whether you've got your full contribution.
If you do have any gaps and you're not quite meeting the full NI requirements, then make some additional payments to make that up.
Now, there's another factor that's worth ensuring,
and that's that the state pensioner loan in the UK is not really enough to maintain a lifestyle
that most of us would expect after a lifetime of working.
So we really do need to think beyond the state retirement pension.
So this is where the private pension step in.
But as well as private pension, it's also worth considering ICES and potentially property investments as other sources of income during retirement.
Now, a private pension in the UK is generally very tax efficient.
Auto enrolment now means that many people will have for the first time joined a private pension
and will be benefiting from tax efficiencies that come from paying into a private pension.
And there's also top-ups from employers on top of your own contributions.
Other people will consider opening a self-invested personal pension or a SIP.
This gives you a lot more flexibility on how you invest money that goes into the pension.
And you may want to think also about diversifying your pension incomes as well.
So we talked about personal pensions and also ICES, which are individual savers accounts.
And these really do have some great efficiencies.
And there's a range of different ICES out there as well.
So these could be cash ICES or they may be stocks and shares ICES.
Or there's some new finance ICES out there, which are quite interesting as well.
But property is not for everyone.
Although people do like to diversify, personal property comes with a lot of work alongside it as well.
And don't forget, now I'm not a financial advisor.
I never was supposed to be.
And anything I talk about here shouldn't be constituted as financial advice.
But it is worth you speaking to a financial advisor if any of these things concern you.
Don't forget, it's never too late to start with a pension.
And then there's a saying that the best time to plant a tree is 20 years ago.
Or if you can't do that, plant one today.
Pensions are very much the same.
So remember, powers and knowledge and the more information you gather around pension and pension investments,
the better you'll be placed.
I hope you found this as interesting as I did looking up the old history of state pensions
and thinking about how state pensions might change in the future.
But if you do have any ideas on how we can solve this problem,
please let me know in the comments.
Thanks for listening and I'll see you on the next one.
Cheers.