Expert Gareth Shaw offers advice on building entitlement to the state pension
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This crisis has been caused by generational shifts which mean fewer people in work have to support more people living in retirement. A Government review of the situation said that “without any additional support in addition to NICs [National Insurance Contributions], the Fund balance will fall rapidly to exhaustion in around 2032-3.”
This means that the tax burden on the workforce may have to be significantly increased to stave off a situation where the UK’s population of retirees cannot be supported, the expert claimed.
Either that, or the income pensioners derive from the state pension will have to be reduced, he continued.
“The ratio of people in retirement will have shifted from 6:1 in 1990, to 2:1 by 2030”, Mr Humphrey said.
This means that whereas one person in retirement could be supported by six in work a little over two decades ago, two people in work will have to support one in retirement.
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This will seriously increase the tax burden on workers and threaten to make state pensions not viable unless reforms are put in place, the expert continued.
Mr Humphrey simply said: “This doesn’t add up”.
He said young people should be thinking about adding to their own pension, as they will likely be asked to pay more taxes into a fund which is not sustainable.
The landscape of retirement is radically different from when state pensions were introduced to the UK in 1948.
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At that point, people would spend, on average, under a quarter of their life in retirement, whereas now people can expect to live over a third of their life in retirement.
The pension crisis is not unique to the UK any more than the shifting generational trends are.
The World Economic Forum warned in 2017 that the world’s six largest pension systems will face a combined shortfall of over £150trillion.
These six countries are the US, the UK, Japan, Netherlands, Canada and Australia.
For the first time in human history, we will see multiple generations living in retirement.
Mr Humphrey said the current outlook for young people is dire.
“Young generations will be paying off their student loans, facing house prices averaging seven times yearly pay and added to that having to fund more people in retirement and those people living longer,” he said.
“Add to this the fact that forecasted returns on pensions have fallen – meaning workers must now contribute 50 percent more to achieve the same predicted pay out, compared to a decade ago.
“The implications of this for health, social care and quality of life during retirement are indescribable.”
This is all despite the fact that the UK Government gives out the lowest pension of any major advanced economy in terms of replacing working-age income.
The UK state pension only pays out a meagre 38 percent of pre-retirement income compared to an average across 35 major economies of 63 percent.
Currently, the cost of paying even this level of benefits is greater than what is being raked in by National Insurance contributions.
As things stand, the shortfall that results from this is being made up by grants from the treasury, but these are limited to 17 percent of yearly expenditure and is due to run out by 2032.
If the state pension system is to remain in place, workers will have to pay more in or pensioners will have to receive less; neither being an optimal decision for any politician to take.
The Office for Budget Responsibility’s (OBR) projections suggests that further increases to the state pension age (SPA) are on the cards.
The SPA is currently 66 and will rise to 67 by 2028.
The official projections show that 26.2 percent of the UK population will be aged over 65 in 2066, compared 18 percent in 2017 and with 12 percent in 1961.
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