Pension Implications on UK's Current Working Population

The 20th century brought with it some remarkable changes and improvements, such as an increased life expectancy. This means most people are living to a ripe old age; hence an observed increase in UK’s ageing population. Due to the expected decrease in the working age people ratio to retired people ratio from 3.7:1 in 1999 to 2.1:1 in 2040, the dependency ratio might increase. Consequently, the working population will be required to pay higher taxes to the government, to better cater for the retired generation.

The current working generation will soon experience a larger burden due to the current spending pension commitments. And because the birth rate is already lower, the working population is already shrinking and is expected to be smaller in future. It is, however, a bit unrealistic to base all calculations on the retirement age of 65 years entirely, because the UK government is already increasing the age at which state pensions can be drawn.

Private sector pensions are also being increased by the UK government to make the ageing population more manageable and a cause for celebration rather than worry. However, as at now, the following there are complex pension considerations for the current working population:

Tax.

The present working population might soon have to pay higher taxes to enable the government to sustain the ageing population. Higher taxes would result in the creation of disincentives to work and for firms to invest, consequently resulting in a considerable decrease in growth and productivity.

Dependency.

An increase in the dependency ratio. If the government fails to raise the retirement age, and the birth rate remains the same, there will be more people claiming retirement & pension benefits while the workforce continues to shrink. Fewer people will be paying income taxes, and the current working population will be over-burdened.

Healthcare.

The government spending more on the ageing population’s health care and retirees’ pension benefits. For the UK government, which has debt issues, the increased spending commitments combined with the decreased tax revenues (because retirees pay lower income taxes, seeing as they’re not working) will take a toll on the government kitty. This burden will likely be transferred to the current working population.

Economic Growth.

If the current working population puts a larger percentage of their income into pension funds, the expected result would be a reduction in the savings available for better, more productive investments. This would in turn cause a reduction in economic growth.

Inflation.

An increasingly ageing population might soon result in a shortage of workers, causing the current working population to be overloaded with more work for the same pay. A shortage of employees would also lead to wage inflation. Companies may have to offer flexible packages to encourage more people to join the workforce. Unlike most of the other impacts, this one is positive.

Birthrate.

A reduced birth rate may result from the foregoing circumstances. However, short term savings for Government (education etc) would mask a longer term issue of a diminishing workforce.

It is clear that there are many issues to be tackled in the next 30/40 years and having a solid pension plan in place is becoming a top priority. If you would like to talk these issues over with one of our friendly team please don’t hesitate to email us here with your contact details: info@mayfairworldwide.com