New calls have been published for the state pension age to rise to 75 with a 40 per cent higher payout.
Those who don't have sufficient funds to live on once they reach 60 would be able to claim Universal Credit.
The Social Market Foundation published a report proposing a larger, but later, state pension called the "Senior Citizen’s Pension”.
The Senior Citizen’s Pension would provide certainty of income until death, but it would be "substantially larger" than today’s state pension (around 40 per cent), the report stated.
Michael Johnson, expert on pensions policy and taxation, and the author of 'Pensions: a vision for the future' explained that having a set amount live on from the age of 75 would encourage retirees to concentrate decumulation of their DC pension pots and other savings into a finite 15 year window between the age of 60 and 75.
DC pots would then go much further (i.e. produce higher incomes) because, with the removal of the life expectancy “tail risk”, annuity pricing over that period would improve, substantially.
Following the introduction of a Senior Citizen’s Pension, retirement income between the ages of 60 and 75 would be derived from one or a combination of
- defined contribution (DC) personal and workplace pension pot decumulation
- final salary / defined benefit (DB) pensions (diminishing over time)
- drawings from ISAs and other savings; and
- legacy State Pension rights (diminishing over time)
Those without significant savings would get additional state support from Universal Credit at the enhanced rate. Income Support would be extended beyond state pension age (currently 66) to form an integral part of the post-retirement benefits framework, and also enhanced to fill the 60-75 income gap.If these changes took place, Johnson stated Pension Credit would then not be needed.
The report calls on a Royal Commission to conduct a review of the state pension’s future financial sustainability.
It is also asking for the idea of means-testing the state pension to be considered like in Australia.
Johnson said "Australia aggressively means-tests its Old Age Pension (OAP) above pretty modest asset and income thresholds. A home-owning couple with net assets (including property) in excess of A$419,000 (£228,000) see their OAP gradually reduced, and if net assets exceed A$954,000 (£519,000) they get nothing.
"Their income test is similarly draconian. If, for example, a couple's combined income exceeds A$336 (£183) per fortnight, they lose 40 cents in OAP for each dollar over A$336 (for singles the threshold is A$190)."
However a subtler approach for the UK could be to introduce means testing for only a few years immediately following SPA.
"It would, however, be open to accusations of being the thin end of the wedge, i.e. that is would only be a matter of time before means testing were extended through until death," Johnson added.
With such a radical approach, Johnson understands it would take years to implement in a fair way.
He said: "Implementation of the Senior Citizen’s Pension would take decades to complete. The legacy State Pension would disappear only very slowly, and payments of the Senior Citizen’s Pension would only commence once those who were at SPA when the SCP were introduced reach the age of 75.
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"Prior to this, they would receive an (age-dependent) combination of the legacy State Pension and Income Support.
"Detailed cost modelling would be required, with variables including demographic “shape”; the maximum size of the Senior Citizen’s Pension, its indexation and eligibility criteria; the parameters for any means testing of the legacy State Pension; and the exact structure of the (age-extended) Income Support.
