Numerous reforms have been introduced to the UK pensions system over time and, as new rules have been implemented, entitlements under previous systems have sometimes been preserved. Consequently, individuals retiring at any given time can still be impacted by prior pension rules (see below).
The UK government provides a basic state pension dependent on individuals’ National Insurance contributions history, the dates they made these contributions, and the date at which they reach state pension age (Bozio et al. 2010). To qualify for a state pension, individuals must have accrued, throughout their working life, at least ten qualifying years and 30 years for a full pension. After an individual has accumulated 30 qualifying years, any additional qualifying years contribute towards the additional state pension (Nidirect 2015). A single-tier scheme will be introduced from 2016, and full entitlement will be based on 35 qualifying years of National Insurance contributions. Those with at least ten years but fewer than 35 years will receive a pro-rata amount. Individuals who reach state pension age on or after 6 April 2016 will be affected by these changes, consequently these changes will have an immediate effect on workers in their 50s. Those who reach state pension age earlier will continue receiving pensions under the old scheme, even if they have deferred claiming state pension (HM Government 2015a).
Following concerns that the uptake of occupational pension schemes has fallen since 1967 (DWP 2013), to encourage greater private pension savings, The Pensions Act 2008 set up an automatic enrolment for occupational pensions to be phased in between 2012 and 2018. Eligible workers are given a month to opt out of the workplace pension scheme following the automatic enrolment (PAS 2015). Those aged 50+ who have opted out from an occupational or other private pension schemes will only be eligible for the state pension. Any contribution made under occupational/private pension scheme will be available to an individual upon retirement, however, the precise retirement options will depend on the years of service and the size of the pension pot an individual accrued.
The Pensions Act 2014 increased choice for people with defined contribution pension savings. Prior to the Act, savers were able to take a 25 % tax-free cash lump sum, and were encouraged to purchase an annuity with the remainder. From 2015, savers over the age of 55 have several options: cash in their entire pension pot in one withdrawal; or take up to a quarter of their pot as a one-off tax-free lump sum and convert the reminder into an annuity. Individuals can also take money flexibly (drawdown) in two ways: People can always take a 25 % tax-free lump sum and they may take the balance either as a regular income or take ad hoc cash sums. Pensioners may also mix different options. Drawdown of pension income under the new arrangements will be taxed at the individual’s marginal income tax rates rather than the previous rate of 55 % for full withdrawals (HM Treasury 2014; PAS 2015).
The greater choice means greater individual responsibility as, alongside improvements in life expectancy, individuals will need to manage their retirement income over a longer period than past generations, and there are concerns that the new policy may encourage people to use pension assets too quickly (see, for example, Reform 2015). To address some of these concerns, the government created Pension Wise in 2015 – a free and impartial service with information and advice about options available to defined contribution pension members (HM Government 2015b).
Activation policies in the UK focused on particular groups of younger workers in the past. The Work Programme, a government welfare-to-work scheme, was introduced in 2011 to create a single initiative to help the long-term unemployed, disabled, or people with health conditions into work regardless of age (DWP 2012). In this fee-for-performance programme local providers are free to identify the most effective way of helping people into sustained work. Between 2011 and 2014, people 50+ have constituted just over 20 % of all referrals and the job outcome for the group was at around 10 %. Work Programme performance (referrals and outcomes) sharply declines for participants over 50 years old and more so for women than for men. The pattern appears to be directly linked to age and not caused by higher incidence of disability or particular health conditions among older people (Foster et al. 2014). The toughening of assessment of disabled people’s eligibility for the new Personal Independence Payment (PIP), as well as changes to the Work Capability Assessment (WCA) introduced in 2015, the medical test to assess eligibility for Employment and Support Allowance (ESA) for individuals unable work due to illness or disability, may also create incentives for some people aged 50+ to seek employment if they lose their right to PIP or ESA. Employers are legally obliged to make ‘reasonable adjustments’ partly to encourage disabled people to remain longer in employment (HM Government 2015c).
Increases in state pension age combined with removal of the default retirement age (DRA) of 65 have led to higher employment rates of individuals over the age of 50. Until 2010, men over the age of 65 and women over the age of 60 were entitled to claim state pensions. Following The Pensions Act 2007, the retirement age for women is being harmonised to match that of men by 2020. Women aged 60 to 64 are directly affected by this equalisation and between 2010 and 2015 this group recorded the highest growth in employment, increasing by 6.8 % to 40.7 % (DWP 2015 ).
The increase in retirement ages for both women and men from 65 to 68 will be implemented between 2024 and 2046, and The Pensions Act 2014 provides for a regular review of the state pension age at least once every five years. The Employment Equality Regulations 2011 abolished the DRA from October 2011 and employees can no longer be retired compulsorily when they become 65 years old, so older workers are able to continue to work if they wish to do so. It is still possible for employers to impose a compulsory retirement age provided that they can objectively justify it (e.g. police officers). The removal of DRA is to be reviewed in 2016 (HM Government 2015a).
Government departments have introduced initiatives to increase employment opportunities for people over 50. An older workers champion scheme (April 2015) tackles age discrimination in the workplace and influences businesses to recognise the benefits of hiring older workers. The scheme offers intensive work support for older jobseekers with a career review, job training, digital training/support, and link-ups with small and medium-sized businesses with vacancies to fill. In 2014, the government also appointed an Older Workers Business Champion to make the case for older workers and challenge outdated perceptions within the business community (HM Government 2015a).
Early retirement policies
Individuals are not entitled to receive a state pension before they reach the state pension age, even if they are unable to work or retire earlier. The state pension age has increased since 2010 and will reach 68 for both men and women by 2048. Individuals who are unable to work due to e.g. ill health can claim Employment and Support Allowance (see section above on activation policies) until they reach state pension age, when they are able draw on state pension provided that they have accrued the minimum qualifying years.
Individuals usually can draw on personal and workplace pensions earlier than the state pension. Before 2010 the normal minimum pension age was 50; in April 2010 the government increased it to 55 and it will raise to 57 by 2028. Although usually individuals have to be 55 years old to draw on pensions, the options for early retirement still vary depending on workplace, personal, or stakeholder pension schemes. Some freestanding Additional Voluntary Contributions schemes (which allow members of workplace pension schemes to pay extra contributions to accrue additional benefits) can be used to fund an early retirement date (HM Government 2015a; PAS 2015). Special pension schemes are set-up for people in certain industries (e.g. the Armed Forces Pension Scheme, The Firefighters’ Pension Scheme, The Police Pension Scheme, for sports professionals) in these schemes individuals are permitted to retire before the normal pension age (HM Government 2015a).
Exceptions also apply to those who joined the pension scheme before 2006 with a right to take their pension before the age of 55, with a smaller pension pot (HM Government 2015a). Many employment/private pension schemes allow early retirement on grounds of ill-health and disability when individuals become incapable of doing their work because of physical or mental impairment and their accrued benefits are paid in full with no reduction. Private/workplace pension schemes have their own definitions and assessments of ill-health. Individuals diagnosed with an illness, or other health problems that could reduce their life expectancy, may be able to get a higher retirement income (an enhanced annuity) (Nidirect 2015).
- Bozio, A., Crawford, R., & Tetlow, G. "The history of state pensions in the UK: 1948 to 2010". Institute for Fiscal Studies, London (2010).
- DWP. "The Work Programme". Department for Work and Pensions, 2012.
- DWP. "The single-tier pension: A simple foundation for saving". The Stationery Office Limited, London, 2013.
- DWP. "Employment statistics for workers aged 50 and over, by 5 year age bands and gender. From 1984 to 2015". The Stationery Office Limited, London, 2015.
- Foster, S., Colechin, J., Bivand, P., & Foster, R. "Employment support for unemployed older people: Age UK". 2014. Available at: http://www.learningandwork.org.uk/sites/niace_en/files/publications/Age%20UK%20Report%20FINAL.pdf.
- HM Government. "State pensions". 2015a. Available at: https://www.gov.uk/browse/working/state-pension
- HM Government. "Pension Wise". 2015b. Available at: https://www.pensionwise.gov.uk/en
- HM Government. "Disability rights". 2015c. Available at: https://www.gov.uk/rights-disabled-person/employment.
- HM Treasury. "Freedom and choice in pensions: Government response to the consultation". The Williams Lea Group, London, 2014.
- Nidirect. “Pensions and retirement planning”.2015. Available at: https://www.nidirect.gov.uk.
- PAS. “About pensions”. 2015. Available at: http://www.pensionsadvisoryservice.org.uk.
-  This refers to England and Wales, Scotland, and Northern Ireland.
-  The amount of state pension people are entitled to is based on National Insurance contributions record over working life from age 16 until state pension age. Qualifying years include time when an individual a) was working and paid National Insurance contributions, b) was getting National Insurance credits, e.g. for unemployment, sickness; The Pensions Act 2008 introduced national insurance credits for parents and carers, c) was paying voluntary National Insurance contributions. A minimum amount of contributions or credits is required for a year to count as a ‘qualifying year’ towards overall contributions record.
-  Defined contributions pensions are based on how much has been paid into a pension pot.
-  The pension tax legislation in force prior to 6 April 2015 strongly encouraged purchasing annuities, applying a 55 % tax to lump sum or flexible payments other than in limited circumstance (Thurley, 2015).
-  Job outcome is a cumulative period of either six or three months in paid work depending on the payment group.
-  In 2013, Personal Independence Payment (PIP) replaced Disability Living Allowance (DLA) for new claimants with a long-term health condition or disability aged 16 to 64. The benefit is not means-tested and is not related to employment status.
-  This may include adjusting working hours or providing people with a special piece of equipment to help them do the job.