Budget 2011: Younger staff will work to 80 under pension link to rising lifespans

Millions of employees could see their retirement pushed back at least 12 months every two years after George Osborne announced plans to link the pension age to rising longevity.

Younger staff will work to 80 under pension link to rising lifespans Photo: ALAMY

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In a move intended to halt the trend for workers to spend a growing proportion of their lives in retirement, the Chancellor announced a mechanism to raise the state retirement age automatically in line with life expectancy. The pension age is already due to increase to 66 by 2020.

But with one in five people alive today expected to celebrate their 100th birthday, ministers have concluded that more radical steps are necessary.

Mr Osborne said it would no longer be “affordable” to provide an adequate state pension when most people could retire at the relatively young age of 65 or earlier.

In future, he said, regular, independent reviews should establish longevity rates, which would then be used to decide the state pension age.

Retirement for millions of public sector employees is due to be linked to the state pension age by the end of the current parliament, so the move will affect a significant proportion of the workforce. Longevity is rising at a rate of seven months every year, meaning that, under the proposal, employees in their twenties, thirties and forties could find themselves working beyond their 75th or even 80th birthday.

A number of other European countries, including Sweden, Norway and Germany, have introduced some link between the state retirement age and life expectancy.

Mr Osborne said that adopting a similar link would “help Britain live within her means”. He said he wanted pensions which were fair to workers and “fair to the taxpayers who have to fund them”.

Big pension funds increased their longevity expectations for the fourth year running last year, saying they expected future pensioners to live an extra seven months. Men who are currently 65 should expect to live until they are 87 years and five months, while women will survive to nearly 90 on average.

At the current rate, by 2066, around half a million people a year will be celebrating their 100th birthday, compared with about 10,000 now.

Charities warned that older people without good health would struggle.

Michelle Mitchell of Age UK said: “We accept that rises in the state pension age should be considered. But we must guard against any automatic system for future increases being based solely on average life expectancy.

“Other equally important factors must be taken into account such as the impact on the poorest, the unemployed and those with health problems.”

Pension fund managers welcomed the move. Joanne Segars, of the National Association of Pension Funds, said: “As people live longer, increases in the state pension age are a must. But they need to be handled fairly.

The plan seemed sensible, “as long as people are given enough time to plan for their retirement”.