State pension age must rise to 70, major report says

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https://moneyweek.com/state-pension-age-future

A review of the state pension shows costs could rise to unsustainable levels, which could force the government to hike the state pension age or cut benefits.

The state pension age will hit 70 by 2050 according to a new study by the Institute for Fiscal Studies (IFS).

According to the IFS’ Pensions Review, the state pension age will need to rise substantially in the decades ahead as there are not enough workers to match the growing state pension bill as life expectancy improves.

Projections from the Office for Budget Responsibility (OBR) suggest spending on payments to pensioners will rise from 5.6% to 9.6% of national income over the next 50 years - an increase worth £100bn a year in today’s terms.

The report, which also called for an overhaul of the pensions system in the UK, notes the state pension age will be needed to make sure the share of adults over the state pension age remains at the current rate of 24%.

The proposed move would significantly impact those around 50 years of age, according to the IFS. Those born around the mid-70s would have broadly missed out on final salary pensions as well as the full duration of the auto-enrolment scheme, leaving them at greater risk of retiring with a pension shortfall.

James Jones-Tinsley, self-invested pensions technical specialist at Barnett Waddingham said: "The IFS is correct that workers in the future do not have a comfortable retirement ahead. Many people will need to work longer and retire on less.”

“We are sleepwalking into a retirement crisis; significant policy change is needed, and quickly.”

What is the future of the state pension?
The state pension rose by a record 10.1% in early April, but the government faces some stark choices when it comes to its future. Much along the same lines as the IFS report, an independent review by the Department for Work and Pensions (DWP) also identified a number of potential pitfalls to the future of the state pension.

The Independent Review of the State Pension Age, which looked into the metrics the government should use when setting the state pension age, found pension payments will rise to “unsustainable” levels unless the government raises the state pension age to 74 for those currently aged 30 or axes the triple lock.

A cap on state pension spending or speeding up increases in the state pension age are two remedies the report purposes to avoid disaster.

State pension spending cap
The Independent Review of the State Pension Age report says the amount the government will be spending on the state pension is simply too costly “given the very real economic challenges faced by Government and the stark increases in state pension-related expenditure”.

Therefore the report says it is “not appropriate” to increase costs by delaying the increase in the state pension age to 67.

Instead, it recommends the state pension age should rise to 68 between 2041 to 2043, up to three years earlier than currently planned, and to 69 between 2046 and 2048.


The report also proposed the government cap state pension spending at up to 6% of GDP.

But this would leave the government with an “unenviable choice as the population ages”, says Alice Guy, head of pensions and savings at interactive investor.

With a spending cap, the government would have to choose whether to raise the state pension age to as high as 74 for current 30-year-olds or cut the triple lock.

The triple lock ensures the state pension goes up in line with whichever is higher, 2.5%, wage growth or inflation.

But if the pension bill rises to “unsustainable” levels, the government could be forced to scrap the measure.

Increasing the state pension age to 74 for someone currently aged 30 would mean “ they miss out on eight years of state pension compared to current pensioners, worth £209,432 by 2067”, says Guy.

State pension age increase delays seem unlikely going forward
The government recently decided to postpone plans to increase the state pension age to 68 in the 2030s due to decreased life expectancy in the UK.

This was also likely to claw back some favour ahead of the next general election in 2025.

Currently, the state pension age is 66, due to go up to 67 by 2028 and 68 by 2046.

While the delay was welcomed by many, the cost of state pensions and the “current position of UK finances” means we “need a proper debate on the future of the state pension”, said Andrew Tully, technical director at insurer Canada Life.

The state pension is “hugely expensive, and in our pay-as-you-go system where the tax from the workforce pays the pensions of retirees’ there has to be a sensible debate around intergenerational fairness and the affordability of the state pension in its current format”, says Tully.

According to the Office for Budget Responsibility, the cost of the state pension and other pensioner benefits is set to rise by 37%, from £116.8bn in 2021/22 to £160.4bn in 2027/28.

Additionally, the number of people of pensionable age is predicted to rise by 28% to 15.2 million by 2045, while the working-age population is expected to rise by around 4.5% in the same period.

“If we see this shift in the ratio of workers to retirees this will clearly have significant implications around any debate on the future funding of the state pension,” said Tully.

How will this affect private pensions?
The government is planning to link the minimum private pension to the state pension age, setting it at ten years before the state pension age.

If the report’s proposals go ahead, this would mean someone currently aged 30 would have to wait until they are 64 before being able to access their private pension pot.

This highlights the need for people to take saving for retirement into their own hands.

Workers who want to retire earlier would need to start saving into an ISA, which has no age limit, to supplement their retirement.