Private pensions are providing a growing share of our retirement income, a long-term trend driven by the need for cash-strapped governments to shift responsibility onto individuals to make their own financial provision for later life.
Even so, the State Pension is still many years from becoming an irrelevance. Only the fortunate few with large incomes can afford to treat it as ‘pocket money’. For most it provides a firm foundation of income security for life after work which makes it a key part of financial planning for retirement.
The graph below from the government's Pensions Incomes Series shows the shifting pattern over many years between State help and private means and highlights how many of us will have to juggle a range of different potential income sources as we move into and through retirement.
In 2013/14 State Pension and other benefits made up 43 per cent of retirees’ gross weekly income, a fall from 61 per cent in 1979.
Figure 2.4: The Pensioners’ Incomes Series: An analysis of trends in pensioner Incomes 1979 to 2013/14, UK
When you look at income sources, it is no surprise that the proportion of income provided by private pensions – and personal pensions in particular – has risen although interesting the share from investments has declined. Earned income has contributed an increasing amount, but has slipped back since peaking in 2009/10.
The state pension is paid to 97 per cent of all pensioner households and while it may not now provide the majority of the average retiree’s income as it once did, it still delivers a significant minority of that income compared to other sources.
Pensioners are also becoming less reliant on income-related state benefits, with only about one in four (27 per cent) now in receipt compared to nearly six in 10 (57 per cent) back in 1979. Even so, financial support from the state provides the lion’s share of the income for all but the top fifth of single pensioners and top two fifths of pensioner couples.
Most of us support the idea that individuals need to be encouraged to stand on their own two feet rather than rely on taxpayer help.
However, the state pension is something that we feel we have earned and deserve over many years of working and paying our tax. Understanding exactly what state help is available is an important part of the transition from working life into retirement.
Single tier pension
That said, it’s disappointing that the introduction of the Single Tier Pension in April 2016 has been followed by reports of declining understanding about how it works.
Recent figures from Which? suggested only six in 10 (61 per cent) of people aged 50-64 were aware of the changes compared to 68 per cent in February, while two-thirds either did not know or guessed incorrectly the ‘full’ £155.65 level of the new pension.
