Personal Account

A ‘flexible’ state pension system would definitely be fairer but could we or the Government understand a system with so much complexity?

What is a fair return on taxes after working for most of your life? You pay National Insurance for 35 years ( though many pay for more), and in return you receive a state pension for life. The problem, of course, is that how long “life” lasts is different for everyone.

Assuming the pension was frozen at today’s level, £175.20 a week, someone who lived to 80 would receive £127,500 but for a 95-year-old it would be £264,000. Is that fair?

Perhaps this is the wrong question. After all, the clue’s in the name – any national insurance system, in this case against old-age poverty, has winners and losers.

With state pensions, the winners are the wealthy, who avoid the kinds of physical jobs that cut life expectancy and also mean you need to stop working before 66. To compound the problem for the losers, the state pension age is rising to 67 between 2026 and 2028, and to 68 between 2044 and 2046.

These plans were put in train years ago, but since then the pace at which the average life expectancy increases has slowed (see chart, right).

In addition, figures published this week showed that the gap in life expectancy between the richest and poorest was widening. This prompted the Trades Union Congress to call for the pension age to be frozen.

But are there other reforms to make it “fairer”? Everyone receiving the same does aid collective buy-in, as supporters of “universal basic income” often highlight, but something has to give.

It would be barmy to adjust payments based on an individual’s life expectancy. Means-testing will always have advocates but brings extra costs and added complexity. The old two-tier state pension has already been simplified and is now far easier to understand. Early access to state pensions for those in industries where working to 66 is unfeasible has been suggested, particularly after millions of women born in the 1950s were caught off guard by changes to their pension age.

It does make sense to let people take their pension early at a reduced level. This would help those unable to work, or who don’t expect to live long enough, to get a decent return. You can already do the opposite, and defer your pension to inflate what you do receive, but this again mainly benefits the wealthy.

However, the problem is that most of us are terrible at predicting our own longevity and underestimate. This is a financial disaster for someone who takes a lower pension at 50 and then lives to 90. Early access would also add more complexity, with millions receiving different monthly payments.

The TUC is right to warn about the dangers of a rising pension age and its impact on the poorest in society. But any plans to introduce flexible payments will only add complexity to an already confusing system.

It should be pushed to the back of the policy cupboard, pronto. sam.brodbeck@telegraph.co.uk