4. Pensions, retirement and age

The coalition programme

Rather than wait until 2024 when state pension age for men and women was due to increase beyond 65, the government will hold a review to set the date at which it will start to rise to 66. Plans were announced for a Pensions and Savings Bill. The government will also phase out the default retirement age (65) — although it has not set a date for this — and extend the right to request flexible working to all employees.

Age and retirement

The increase in longevity is one of the trends driving increases in both state and occupational pension and retirement ages. The average age at which men over 50 withdraw from the labour force was 64.6 years in April-June 2008. The corresponding figure for women was 61.9 years. Those over state pension age still working included 12.3% of women aged 60 and over and 10.7% of men aged 65 and over. The majority of men and women employed after state pension age work part time (6.8% of men and 8.6% of women).

However, health expectancy is not the same as life expectancy. On 2005 figures, men at 65 had life expectancy of 16.9 years but 12.8 years of healthy life expectancy. For women, the corresponding figures were 19.7 years and 15.5 years. There is a risk that “people will spend a greater part of their retirement in poor health” (ONS).

Research by the Equality and Human Rights Commission (EHRC) indicates that professionals are most likely to feel physically able to carry on working (despite reporting stress, long hours, having occupational pensions and feeling financially able to retire). Manual workers are “more likely to say they are physically less able to do their jobs than when they were younger” while “low-skilled workers in basic jobs stand out as being the occupational group most likely to favour early retirement”. Concerns like this mean that the assumption that many want to or can work longer (see below) may be open to challenge.

State pension age

State pension age is the age at which an individual can start claiming Basic State Pension. Since 1948 it has been 65 for men and 60 for women but, starting from 6 April 2010, it has now begun to increase gradually for women as a result of legislation passed in 1995. By 2020 both men and women will have to be 65 in order to claim their state pension. From 2024 it was due to begin rising again so that by 2046 both men and women would have to be 68 before they could claim their state pension, under the Pensions Act 2007.

State pension age will not begin to rise from 65 to 66 “sooner than 2016 for men and 2020 for women”). Estimates suggest that an early increase in state pension age could save the government £5 billion but would affect men born between 1951 and 1959 and women born between 1955 and 1959 (Institute for Fiscal Studies).

There have been calls for the state pension age to rise further or faster but increases have a knock-on effect on many social security benefits which either become payable or cease to be payable when state pension age is reached.

Around 1.4 million people over state pension age currently stay in employment and there is a lot of varying evidence suggesting that more will do so in future:

• almost nine out of ten believe people should have the right to work past 65 so long as they are capable of performing well in their job (Age UK);

• 62% of women and 59% of men over 50 want to continue working beyond state pension age; and in the recession the proportion of people over 55 planning to work beyond state pension age jumped from 40% to 71%, largely for financial reasons (Working Better, The over 50s, the new work generation, EHRC).

• while 60% say their main reason for staying on in work would be financial 54% also said it would keep them active, in touch with other people, and stop them annoying their partner. About 40% said they’d like to continue working for their current employer although a quarter of these would reduce their hours (Age UK reporting a poll by Wriglesworth Research in 2010).

Despite these longer-term expectations Age UK warned last year that bringing forward the increase in the state pension age would be a big shock to many people planning their retirement, especially those in their mid-50s, with women and the poorest workers hit hardest. The charity accepts that extending working is inevitable “but doing it just by increasing state pension age more quickly won’t achieve the goal”. The labour market also needs to be made “fit for older workers” while those who want to retire after a life of hard work “can do so without being afraid of slipping into poverty”.

Minimum pension age

As part of the pension reforms announced by the government in 2003, the normal minimum pension age rose from 50 to 55 from 6 April 2010. After that date, people will normally only be allowed to start receiving their pension payments from an occupational or a personal pension scheme when they are 55 or older. The exceptions are where they have severe ill health problems or can start their pensions at a lower age that is protected by the pension tax law.

Rules have been relaxed to allow employers to offer their employees the option of flexible retirement. People who are still fit and able as they approach the end of their careers will be able to withdraw gradually from the labour market, combining employment and pension income however they wish, so long as their own pension scheme allows it.

Default retirement age

There is no official retirement age in the UK. The Employment Equality (Age) Regulations 2006 introduced a default retirement age of 65 but this is not mandatory. Employers do not need to set a retirement age at all (says Age Positive’s employers’ guide Age isn’t an issue), the default simply means that — until the law changes — they could set a compulsory retirement age at 65 or above if they choose to. This is now under review.

Compulsory retirement below 65 is unlawful except where an employer can objectively justify the earlier retirement age. The test of objective justification is not an easy one and it would be necessary for the employer to provide evidence. Employers would have to follow the correct procedure which includes giving the employee between six and 12 months notice.

Employees have the right to request to continue working beyond 65 (making their request at least three months before the retirement date) but the employer can refuse and does not have to give any reason for that decision. Pension trustees have the power to amend any scheme rule that conflicts with those regulations while workers who suffer discrimination on grounds of age can bring a claim to an Employment Tribunal (against the trustees and/or the employer).

Workplace retirement policy

More than a third of private sector pension schemes still have retirement ages below 65 (ONS Occupational Pension Schemes Survey) but in the public sector all new starters in the main schemes, and existing and new members of the Local Government Pension Scheme, have a retirement age of 65.

In a report on Public Sector Pensions (2010), the GMB general union pointed out that special provisions apply to the emergency services and armed forces that reflect the specific type of work members of these schemes do, but “in a post age discrimination world, retirement ages should become less relevant”. It highlights the NHS where the average age of retirement for those who can retire on an unreduced pension at 60 is actually 63.

Attitudes among employers are mixed. One poll suggests that two thirds of HR managers believe a mandatory retirement age leads to a loss of knowledge and talent (survey of 200 HR managers by the Age and Employment Network, July 2009). But another suggests that more than one in seven employers operating mandatory retirement age policies (15%) planned to make more use of them to cut workforces during the recession (ComRes survey of HR managers for Age UK’s predecessors).

Changes to the Royal Mail Pension Plan in April 2010 allowed members above minimum pension age to take pension benefits before 65 on an actuarially reduced basis while remaining in employment. It should help them work reduced hours while still building up their pension savings.

Some employers still have lower normal pension ages. At Ineos Manufacturing where the DB scheme is still open (following a dispute in 2008) retirement age is 60 but 65 for new starters. At Usborne Publishing, where there is an open DC scheme, standard retirement age is 65. Employees can request to work beyond this age, but can also plan to retire at any age from 55.

Early retirement, redundancy and ill-health pensions

Pension schemes (or a separate Permanent Health Insurance policy) may include rules on ill-health early retirement. The GMB pensions handbook points out it is normal practice for schemes to reduce early retirement pensions except in instances of ill-health.

UNISON has warned that some employers are adapting less generous pension policies on retirement or redundancy. Local government pensions legislation allows employees either to enhance provisions or provide compensation in the event of redundancy “in the interests of the efficiency of the service.”

The Equality and Human Rights Commission (EHRC) warns that if employees retire before they are old enough to receive a state pension (60 for a woman, 65 for a man) “their pension may eventually be smaller than if they’d carried on working. Likewise, if they pay into a company or personal pension, their pension fund will be smaller than if they’d carried on working”. Tower Hamlets council recently lost a tribunal case to an employee made redundant months before his 50th birthday (the age at which he would have qualified for an unreduced pension). It was found that the employer had “sought to bring about a redundancy before the age of 50 in order to avoid the pension cost” (GMB).

Making work fit for older workers

Like its Labour predecessor the coalition government recognises that an older workforce needs more flexible working arrangements and proposes to extend the existing “right to request”. But structural barriers and outdated stereotypes are forcing people out of work early, the EHRC has warned: “While Commission research shows employers are offering lower level, part-time work to over-50 year olds, twice as many older workers want a job promotion compared to those that want to down shift”.

Flexibility in hours and locations is crucial to keeping older workers in the workforce longer. Eighty-five percent of people not working and over the state pension age say greater availability of part-time or flexible jobs would help them gain a job. Abolishing the default retirement age and raising state pension age both need to be accompanied by a drive to meet the health, caring and work needs of the over-50s to enable them to remain in the workforce. The government and employers will also have to address the training needs of older workers.