State pension is not enough to live on, minister admits

Millions of Britons face a "hell of a shock" when they reach retirement because of their failure to save.

In his first major interview, the Pensions Minister, Steve Webb, admitted that the basic state pension of £97 a week is "not enough to live on", and confirmed that the Government would raise the state retirement age to 66 earlier than planned. He said that around seven million people are currently not saving enough to meet their retirement aspirations.

Mr Webb agreed that the pensions industry has "an image problem", but suggested that the many people who have shunned it and instead chosen to rely on the value of their home to fund their retirement are following a "very risky" strategy.

He also refused to rule out cuts to the winter fuel allowance, maintaining only the strict, but imprecise, terms of the coalition agreement that "we will protect" the payment. The payment is not means tested. Many see it as a prime target for savings in the welfare budget.

Before the general election the Liberal Democrats proposed raising the age limit to qualify for it, but extending it to people with disabilities. In many cases, opposition to a cut, especially if the winter is especially severe, will be intense.

Mr Webb is one of 22 Liberal Democrat ministers serving in the coalition government.

While the Department of Work and Pensions is currently consulting on raising the retirement age – a move planned by the previous government – Mr Webb confirmed that new retirement ages of 66, 67 and 68 will be brought forward. The original, Labour, plan was for these to be phased in in the 2020s, 2030s and 2040s respectively; they may come much sooner now, and such a move would yield large savings for the exchequer as well as generally easing the burden of an ageing population.

However, those now preparing for their retirement on the basis that they expected to be entitled to a state pension at age 65 rather than 66 or even later – thus generating a gap of several years before the basic state pension become payable – will be bitterly disappointed.

Mr Webb defended the move on the grounds that the total amounts paid to individuals in retirement by the state are much greater than they used to be, simply because life expectancy has risen so dramatically. Mr Webb pointed out that someone retiring at 65 in 1981 typically had about 16 years in retirement, but today someone retiring at 65 can look forward to an average retirement of over 21 years.

He added: "When the state retirement age of 65 was introduced the average life expectancy was 64 and nine months. Speculation that the retirement age would go up to 70 was "nonsense", though.

Mr Webb said that ministers continued to be worried by under-provision for retirement throughout the population: "Less than half of people are building up any entitlement, apart from the state pension". Mr Webb said that coalition still planned to introduce a new "soft compulsion" workplace pension-scheme for workers earnings up to about £33,000: the so called "NEST" scheme, or the National Employment Savings Trust.

Mr Webb said that his department did want to go ahead with "auto-enrolment", meaning that staff would have actively to opt out of their company's pensions scheme, so increasing participation through inertia effects.

However the new ministers, led by the Secretary of State for Work and Pensions, Iain Duncan Smith, have instituted a review to ensure "value for money for the taxpayer and value for money for employers, because it is a burden for them to handle this and put the contributions in, so we have to be sure what comes out at the other end is worth having", in Mr Webb's words.

NEST contributions – 4 per cent of salary for staff, 3 per cent from employers and 1 per cent from the taxpayer – would be invested in the stock market, but Mr Webb said that the Government would offer no guarantee as to the value of the funds: "I can't think of a government anywhere in the world that guarantees against stock-market fluctuations".

But he was sceptical about the alternative many people are e now pursuing: property. Most peoples' homes would probably only raise "a couple of thousand a year" once converted into an annuity, said Mr Webb – a sum that would not make up the difference between typical earnings of around £25,000 a year and the £5,000 or so from the basic state pension. Such a drop would be "a hell of a shock".

It is the long-term prospects for the winter fuel allowance that may pose the biggest challenge for Mr Webb over coming years. Pressed on it, Mr Webb merely repeated the phrase that "we will protect it" in the coalition agreement, suggesting that it may be reviewed and reformed in due course – though in the Budget the Chancellor announced the £250 and £400 sums, depending on age, will be retained for this coming winter. It could go lower in later years, however.

Winter fuel payments are usually £200 for households containing someone aged 60 to 79, and £300 for households with someone aged 80 or over. However these amounts were increased for the winter of 2008-09 and retained in 2009-10 at a higher rate of £250, and £400 for households with older people.

The elderly in numbers

600,000 The amount by which pensioners outnumber under-16s in the UK

25 per cent The proportion of the population expected to be aged over 65 in 2035

75,000 The number of cards Buckingham Palace is expected to have to send to centenarians per year by 2050, compared to the 5,000 it will send out by the end of this year

21 The number of years today's pensioners can expect to live after drawing their first payment, compared to only 16 for those who retired in 1981

7m People not currently thought to be saving enough to meet their retirement aspirations.