1 00:00:00,000 --> 00:00:04,100 Today I wanted to have a look at the state pension. 2 00:00:04,100 --> 00:00:08,600 Now this will affect us whether we're starting out in our careers, 3 00:00:08,600 --> 00:00:12,400 we're reaching the end of our retirement or we've even actually retired. 4 00:00:12,400 --> 00:00:17,200 So I've been looking through some historic documents that set out 5 00:00:17,200 --> 00:00:20,800 how the state pension was defined and evolved in the UK 6 00:00:20,800 --> 00:00:32,000 and also some forward-looking documents on how the state pension could potentially change in the coming years. 7 00:00:32,000 --> 00:00:36,800 So I'll go back to the early 1900s where the state pension was being tested 8 00:00:36,800 --> 00:00:39,700 all the way through to the introduction of the triple lock. 9 00:00:39,700 --> 00:00:45,300 Now the triple lock generates some really interesting implications for the future of the state pension. 10 00:00:45,300 --> 00:00:51,000 Well let's go back to 1909 when the very first state pension was introduced 11 00:00:51,000 --> 00:00:54,500 and back then it was called the old age pension. 12 00:00:54,500 --> 00:00:57,800 It was actually called that back in the 70s as I recall as well. 13 00:00:57,800 --> 00:01:04,200 So we're going back to a time when phones weren't a thing and electricity was barely used 14 00:01:04,200 --> 00:01:08,200 and the average life expectancy was only 52. 15 00:01:08,200 --> 00:01:14,500 And if you did make it much past 52 you were generally going to be facing real financial hardship 16 00:01:14,500 --> 00:01:17,700 and that's where the state pension came in. 17 00:01:17,700 --> 00:01:21,200 It didn't actually kick in until you were over 70 though 18 00:01:21,200 --> 00:01:24,700 and it wasn't a universal system like we have today. 19 00:01:24,700 --> 00:01:30,400 It was actually means tested and back at the time the amount that was paid was either 20 00:01:30,400 --> 00:01:37,100 five shillings per week for a single individual or seven shillings and sixpence for a married couple. 21 00:01:37,100 --> 00:01:44,300 So to put that into perspective today for a single person that'd be about 21 pounds per week 22 00:01:44,300 --> 00:01:49,700 and that's a far cry from what we think is a livable pension today. 23 00:01:49,700 --> 00:01:54,700 This does put a spotlight though on how we live today and our expectations 24 00:01:54,700 --> 00:01:57,600 and what they are compared to what they were back then. 25 00:01:57,600 --> 00:02:01,400 And this was quite a groundbreaking step at the time 26 00:02:01,400 --> 00:02:09,100 but it's an important lifeline for those who'd work their whole lives but no longer support themselves. 27 00:02:09,100 --> 00:02:13,800 It set the stage for everything that followed in the world first state. 28 00:02:13,800 --> 00:02:17,200 If the UK was ever going to modernize and industrialize 29 00:02:17,200 --> 00:02:20,600 then the pension system needed to kick in and keep up. 30 00:02:20,600 --> 00:02:24,400 The UK became reliant on its population to drive the economy. 31 00:02:24,400 --> 00:02:30,200 So 16 years later and in 1925 the contributory pension came into force 32 00:02:30,200 --> 00:02:32,600 and this included manual workers. 33 00:02:32,600 --> 00:02:38,100 It was seen as recognition of their valuable role to society and the economy as a whole 34 00:02:38,100 --> 00:02:44,800 and this broadened pensions to not just be for the few but actually for everyone in the country. 35 00:02:44,800 --> 00:02:49,400 And what's important here is the start of the contributory system. 36 00:02:49,400 --> 00:02:55,100 So you made contributions and you were entitled to a pension when you reached retirement age. 37 00:02:55,100 --> 00:03:00,800 So this laid down the groundwork for the pension system that we know and understand today. 38 00:03:00,800 --> 00:03:04,900 So everyone contributed and everyone was entitled to benefits at the end 39 00:03:04,900 --> 00:03:09,600 and this was a big step towards a more socially stable UK. 40 00:03:09,600 --> 00:03:16,400 So let's fast forward now right up to the 1980s when the pension system really started to face some pressure. 41 00:03:16,400 --> 00:03:19,400 This was when the Social Security Act came into force 42 00:03:19,400 --> 00:03:24,100 and some wide sweeping changes to the way pensions were delivered. 43 00:03:24,100 --> 00:03:28,700 The Act broke the link between average worker earnings and pension payouts 44 00:03:28,700 --> 00:03:36,300 and the government of the day announced that this is a way to stabilize the UK to be able to pay pensions 45 00:03:36,300 --> 00:03:40,100 even when there's economic difficulties in the country. 46 00:03:40,100 --> 00:03:45,100 If wages were still rising, pensions would rise generally too. 47 00:03:45,100 --> 00:03:50,100 But during economic downtimes, pensions could actually reduce. 48 00:03:50,100 --> 00:03:55,800 So this was really intended to protect pensions from economic swings. 49 00:03:55,800 --> 00:03:57,800 Now the pension reforms didn't stop there. 50 00:03:57,800 --> 00:04:03,800 So between 1995 and 2018, there were significant changes to the pension. 51 00:04:03,800 --> 00:04:09,400 These pension Acts were focused on aligning the pension age for women and men 52 00:04:09,400 --> 00:04:17,500 and the outcome of this was a shared pension age of 66, a big step towards equality in the pension systems. 53 00:04:17,500 --> 00:04:20,800 But this didn't come easily and it wasn't without controversy, 54 00:04:20,800 --> 00:04:25,800 particularly for women who planned their retirement based on the old system. 55 00:04:25,800 --> 00:04:28,500 We now refer to this as the Waspie Women. 56 00:04:28,500 --> 00:04:34,000 And at this point, the second state pension or the S2P was introduced. 57 00:04:34,000 --> 00:04:41,800 So in 2002, this pension was designed to provide support for those with care responsibilities or some disabilities. 58 00:04:41,800 --> 00:04:49,800 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. 59 00:04:49,800 --> 00:04:57,600 And S2P was seen at the time as a fairer way to make sure that everyone benefited from the state pension. 60 00:04:57,600 --> 00:05:05,800 So now we've seen the state pension change from very basic means system into a contributory system that we know today. 61 00:05:05,800 --> 00:05:07,600 But things didn't stop there. 62 00:05:07,600 --> 00:05:13,700 There's significant pressure on the pension systems now due to demographic shifts. 63 00:05:13,700 --> 00:05:19,700 The biggest of the changes that was introduced was the triple lock. 64 00:05:19,700 --> 00:05:24,000 So the triple lock was brought in in 2011. 65 00:05:24,000 --> 00:05:29,700 It guarantees that the state pension will increase every year by at least two and a half percent. 66 00:05:29,700 --> 00:05:35,300 However, if inflation or average wage growth are higher than two and a half percent, 67 00:05:35,300 --> 00:05:40,300 then it will go up by the higher of the three amounts, hence the name triple lock. 68 00:05:40,300 --> 00:05:48,300 So even at times when inflation is low, pensioners are guaranteed to go up by 2.5 percent. 69 00:05:48,300 --> 00:05:53,800 So over time, it's potentially possible for the value of pensions to rise above inflation. 70 00:05:53,800 --> 00:06:02,900 And this is a powerful guarantee because it means pensioners don't need to worry about their pensions being eroded over time by inflation. 71 00:06:02,900 --> 00:06:11,800 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, 72 00:06:11,800 --> 00:06:15,900 this could put significant pressure on government budgets. 73 00:06:15,900 --> 00:06:18,400 I'm going to look at that in a bit more detail later. 74 00:06:18,400 --> 00:06:26,000 But before we dive into that, there's another major overhaul of UK pensions back in 2016. 75 00:06:26,000 --> 00:06:30,200 This is when the new state pension was introduced. 76 00:06:30,200 --> 00:06:39,300 So the new state pension was a replacement for the old pension plus the S2P, and it was meant to simplify things. 77 00:06:39,300 --> 00:06:45,200 Now, I'm all for simplification and it's generally a good thing, but there are always some losers. 78 00:06:45,200 --> 00:06:54,500 The new state pension introduced a flat rate for everyone dependent on payments up to 35 years worth of national insurance contributions. 79 00:06:54,500 --> 00:07:01,800 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. 80 00:07:01,800 --> 00:07:03,500 We'd like to know what your story is. 81 00:07:03,500 --> 00:07:06,100 So let's switch focus to today. 82 00:07:06,100 --> 00:07:11,400 So what are the challenges for the current state pension and where are we headed? 83 00:07:11,400 --> 00:07:18,900 One of the issues that's been getting a lot of attention recently has been the focus on taxing the state pension. 84 00:07:18,900 --> 00:07:27,100 Now, people think of pensions as a reward for working hard during your working life and that taxing this would always be unfair. 85 00:07:27,100 --> 00:07:34,300 Now, in the UK, state pensions are classed as taxable income in the same way earnings from employment are. 86 00:07:34,300 --> 00:07:36,700 So here's where it gets tricky. 87 00:07:36,700 --> 00:07:47,000 The full state pension for this year is £11,502 whilst our personal allowance is frozen at £12,570. 88 00:07:47,000 --> 00:07:49,900 We can see where this is going with the triple lock. 89 00:07:49,900 --> 00:07:56,000 The full state pension amount is creeping closer and closer to that personal allowance amount. 90 00:07:56,000 --> 00:08:02,900 And that's because of the triple lock, which guarantees at least 2.5% per year. 91 00:08:02,900 --> 00:08:10,300 Wage growth at the moment is predicted at 5.7% and state pensions keep rising at this rate. 92 00:08:10,300 --> 00:08:14,800 It's only a matter of time before it catches up with the taxable allowance. 93 00:08:14,800 --> 00:08:23,300 And this means it's inevitable that pensioners would start to pay income tax and maybe for the first time ever in their lives. 94 00:08:23,300 --> 00:08:28,000 And people are already starting to refer to this as a retirement tax. 95 00:08:28,000 --> 00:08:30,600 So what can we do about this? 96 00:08:30,600 --> 00:08:37,100 Well, one option is to raise the personal allowance and always ensure that it keeps ahead of the triple lock for pensions. 97 00:08:37,100 --> 00:08:45,500 And this would go some way to ensuring that pensioners who are on low incomes would avoid being dragged into that tax regime. 98 00:08:45,500 --> 00:08:53,800 Another possible outcome that they could place a cap on the triple lock, but this would erode pensions over time. 99 00:08:53,800 --> 00:08:58,900 Whatever system is dreamt up will need to find a balance between protecting the incomes of pensioners 100 00:08:58,900 --> 00:09:04,100 and making sure that the whole pension system doesn't become unaffordable and collapse. 101 00:09:04,100 --> 00:09:12,600 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. 102 00:09:12,600 --> 00:09:14,400 It really can't be ignored. 103 00:09:14,400 --> 00:09:21,600 But if you got thoughts on how we could potentially do this in a more fair way, please let us know in the comments. 104 00:09:21,600 --> 00:09:24,900 It's always important if you are looking to claim your pension soon, 105 00:09:24,900 --> 00:09:33,800 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. 106 00:09:33,800 --> 00:09:37,400 You should be able to validate whether you've got your full contribution. 107 00:09:37,400 --> 00:09:44,200 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. 108 00:09:44,200 --> 00:09:46,600 Now, there's another factor that's worth ensuring, 109 00:09:46,600 --> 00:09:51,400 and that's that the state pensioner loan in the UK is not really enough to maintain a lifestyle 110 00:09:51,400 --> 00:09:55,600 that most of us would expect after a lifetime of working. 111 00:09:55,600 --> 00:09:59,600 So we really do need to think beyond the state retirement pension. 112 00:09:59,600 --> 00:10:03,400 So this is where the private pension step in. 113 00:10:03,400 --> 00:10:12,600 But as well as private pension, it's also worth considering ICES and potentially property investments as other sources of income during retirement. 114 00:10:12,600 --> 00:10:17,400 Now, a private pension in the UK is generally very tax efficient. 115 00:10:17,400 --> 00:10:24,000 Auto enrolment now means that many people will have for the first time joined a private pension 116 00:10:24,000 --> 00:10:30,100 and will be benefiting from tax efficiencies that come from paying into a private pension. 117 00:10:30,100 --> 00:10:35,200 And there's also top-ups from employers on top of your own contributions. 118 00:10:35,200 --> 00:10:40,200 Other people will consider opening a self-invested personal pension or a SIP. 119 00:10:40,200 --> 00:10:45,400 This gives you a lot more flexibility on how you invest money that goes into the pension. 120 00:10:45,400 --> 00:10:50,900 And you may want to think also about diversifying your pension incomes as well. 121 00:10:50,900 --> 00:10:56,900 So we talked about personal pensions and also ICES, which are individual savers accounts. 122 00:10:56,900 --> 00:10:59,800 And these really do have some great efficiencies. 123 00:10:59,800 --> 00:11:02,700 And there's a range of different ICES out there as well. 124 00:11:02,700 --> 00:11:07,900 So these could be cash ICES or they may be stocks and shares ICES. 125 00:11:07,900 --> 00:11:13,800 Or there's some new finance ICES out there, which are quite interesting as well. 126 00:11:13,800 --> 00:11:16,400 But property is not for everyone. 127 00:11:16,400 --> 00:11:24,400 Although people do like to diversify, personal property comes with a lot of work alongside it as well. 128 00:11:24,400 --> 00:11:26,900 And don't forget, now I'm not a financial advisor. 129 00:11:26,900 --> 00:11:28,400 I never was supposed to be. 130 00:11:28,400 --> 00:11:33,500 And anything I talk about here shouldn't be constituted as financial advice. 131 00:11:33,500 --> 00:11:38,800 But it is worth you speaking to a financial advisor if any of these things concern you. 132 00:11:38,800 --> 00:11:41,900 Don't forget, it's never too late to start with a pension. 133 00:11:41,900 --> 00:11:46,000 And then there's a saying that the best time to plant a tree is 20 years ago. 134 00:11:46,000 --> 00:11:48,200 Or if you can't do that, plant one today. 135 00:11:48,200 --> 00:11:50,500 Pensions are very much the same. 136 00:11:50,500 --> 00:11:57,000 So remember, powers and knowledge and the more information you gather around pension and pension investments, 137 00:11:57,000 --> 00:11:58,300 the better you'll be placed. 138 00:11:58,300 --> 00:12:02,700 I hope you found this as interesting as I did looking up the old history of state pensions 139 00:12:02,700 --> 00:12:06,600 and thinking about how state pensions might change in the future. 140 00:12:06,600 --> 00:12:10,100 But if you do have any ideas on how we can solve this problem, 141 00:12:10,100 --> 00:12:12,200 please let me know in the comments. 142 00:12:12,200 --> 00:12:14,700 Thanks for listening and I'll see you on the next one. 143 00:12:14,700 --> 00:12:40,700 Cheers.