How have pensions changed in the last 40 years?

1981 brought us the world's first floppy discs, the first DeLorean sports car and the enduring arcade classic, Pac-Man.

It was also the year that Hargreaves Lansdown was founded. So, like everything that was born in 1981, this year we’re celebrating our 40th birthday,

To mark the occasion, we’re taking a look at some of the things that’ve changed over the last 40 years. The world of pensions is certainly something that’s evolved significantly during this period.

The concept of securing an income for life after work isn’t new. Roman generals would often provide land and income to centurions who hung up their shields, and retirement in the form of a State Pension was introduced in the UK in the early 20th century.

With such a long and varied history, how much can pensions have really changed in just 40 years? Let’s take a look at some of the key developments.

The information in this article isn’t personal advice. If unsure of a course of action for your circumstances, please seek advice.

The State Pension

In 1981, the basic UK State Pension rose to £29.60 a week, which represented 21.9% of the average man’s weekly earnings that year. Compare this to a weekly State Pension of £179.60 in 2021. That represents 31.2% of average weekly earnings for 2021.

The UK State Pension now covers a larger proportion of average weekly earnings than it did in 1981, but why?

Put simply, the increase did not happen in isolation. There are other variables that provide much-needed context for the increase.

Firstly, the age at which you qualify for the State Pension has also increased. This means people are working for longer. And from 2015, to qualify for a full State Pension, you needed 35 years of National Insurance contributions, 5 years more than before.

The average life expectancy has gone up too, which means we need to support ourselves for longer than we did before.

The role of the employer

Employers have an important role to play in helping people plan for life after work. But that role has certainly changed over time and the responsibilities of employers in 2021 look decidedly different to those of 40 years ago.

One of the key changes for employers is the shift from Defined Benefit (DB) plans, which pay a secure income for life based on salary and years of service, to Defined Contribution (DC) pensions, where the scheme value is determined by the value of contributions and the investment returns made. While DB pensions remain common in the public sector, in 2021, DC pensions rule the roost in the private sector.

Modern DC workplace pensions come with their own sets of rules, regulations and responsibilities for employers, even before automatic enrolment procedures are considered.

Following the introduction of automatic enrolment in 2008, the responsibility falls to the employer to assess eligibility, communicate options and consider suitable contribution arrangements.

Back in 1981, companies may have had pensions specialists in their Payroll or HR teams but the requirement for these sorts of expertise is greater now than ever before.

2015 pension freedoms

The idea that your pension is a fixed, regular payment is one that can be hard to shake for some. It’s not surprising given that it was the reality for a lot of people, and for a considerable amount of time too.

The changes to pension freedoms in 2015 helped to change the preconceived ideas about how you draw money from your pension. Since 2015, individuals have had access to more choice and greater flexibility. However, money in a pension can normally only be withdrawn from the age of 55 (57 from 2028).

Whether flexible drawdown, lump sum payments or purchasing an annuity, the idea that your pension simply pays you a steady income when you stop working has changed. It’s increasingly important to understand your options and choose what’s right for you. This means that at least some level of engagement with your pension is often essential.

The additional responsibility placed on the individual has also given rise to more nuanced retirement advice, as well as Government-backed guidance like Pension Wise. These have helped to support people in understanding the options available to them.

The role of the individual

The 2015 pension freedoms certainly gave more choice to individuals at retirement, but retirement isn’t the only time someone can make choices about their pension.

In fact, it could be argued that choices you make about your pension 20 or 30 years before retirement could have a greater impact, especially on the standard of living you can expect when you stop working.

How much you contribute and where you invest will significantly change the value of a pension over time. And the more time you have, the greater the potential impact.

Keep in mind that investments will go down as well as up in value, so you could get back less than you invest.

With an increase in platforms providing a digital experience, reviewing your pension doesn’t have to mean rooting around in a drawer looking for statements. Modern websites and mobile applications are helpful tools to increase overall pension awareness and help the topic of pensions to resonate with younger generations.

Part of something bigger

Traditionally, although it was something you’d looked forward to, it was common practice to only consider your pension in the run-up to retirement. This was largely due to the prevalence of DB schemes, which typically required less attention and understanding than many more contemporary DC pension plans.

With the developments we’ve explained so far, it’s clear that the earlier you start planning for retirement, the better. Pensions in 2021 are increasingly commanding the need for early consideration both on the individual level and for employers.

We think that your pension should form a part of your wider personal finance considerations, and that workplace pension education in particular forms a vital part of financial wellbeing. This isn’t necessarily something that was considered in 1981.

What could we expect from the next 40 years?

While we’d love to be able to read the tea leaves here, there are no certainties. Pension and tax rules can and do change.

As we’ve seen, the last 40 years has brought about significant developments, many of which would have been difficult to predict in the early 1980s.

We’ll continue to watch for changes and reform in this area.

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