How sweet should the higher State pension offer be?
The State is proposing a higher State pension for those that defer retirement to age 70 instead of age 66. However, the current offer of a higher weekly rate of €315 compared to €265.30 for those retiring from age 66 does not represent good value for money.
While the State does offer extraordinary generous tax relief for people saving into a private pension, the new offer for the flexible State pension needs to be significantly improved on if it is to provide a real financial benefit to those planning for their long-term financial wellbeing.
Two areas of consideration
At present, the annual State pension will pay about €14,000 per year. Deferring that by four year means the lost income is about €56,000. To recover this amount, factoring for the higher weekly rate of €315, the recipient would need to live to about age 89 to recover that lost income. Unfortunately, most people will not live that long. Life expectancy in Ireland is about 82 (80 for men and 84 for women).
Additionally, due to inflation, the future value of those higher weekly rates will have less buying power than today. Even if inflation does fall back to the target rate of 2%, State pension payments traditionally increase by less than the target rate of inflation. And to make matter worse, inflation at present is much, much higher.
How much more is needed?
The State pension would need to increase to about €400 per week for those that defer until age 70 for it to make financial sense. This higher rate would represent a real premium where they would claw back lost income by age 77/78 (without factoring for the impact of inflation). At this higher rate, recipients could expect to have a few years of life where their patience would really pay off.
There are other considerations that are also worth noting. One of course is the fact that on average, women will have lower private pension funds due to a variety of factors, including lifetime earnings and family caring decisions that reduce their career earnings / pension enrolment. So even if they live longer, the risk of lower or no private pension provision means the State pension plays a far greater role in their personal financial wellbeing. Deferment for them may simply not be an option.
Additionally, the fact that people will be older when they access their State pension means they may not in tip-top shape physically to enjoy it is another consideration.