What is the future of the State Pension?

07 June 2024

Written by Retirement Line Updated: 7th June 2024

Half of under-50s doubt that there will be a State Pension to provide for them by the time they retire, recent research has found.

According to Money Marketing, the research by Phoenix Group spoke to 2,000 people to explore public attitudes towards the State Pension. In addition to the doubts expressed over the sustainability of the State Pension, it also found that public knowledge of how the system works is seemingly lacking. 

Phoenix say that the findings highlight a need for greater communication over how the ‘triple lock’ works, and when people can access their State Pension.

The State Pension is the backbone of financial security for many of the UK’s retirees. Yet, with an increasingly ageing population and economic pressures, could its future be uncertain? We consider the current state of the UK State Pension, the challenges it faces, and potential future scenarios.

Current state of the State Pension

The UK State Pension system operates on a pay-as-you-go basis, meaning that today's workers fund the pensions of current retirees through their National Insurance contributions. The State Pension is split into two main types:

• Basic State Pension: For those who reached State Pension age before 6 April 2016.

• New State Pension: For those who reached State Pension age on or after 6 April 2016.

The amount a person receives depends on the number of qualifying years they have on their National Insurance (NI) record. A minimum of 10 years NI contributions or credits are required to receive anything and a maximum of 35 is needed to receive the full new State Pension. 

What is the triple lock guarantee?

The State Pension increases each year in April at least in line with average earnings. However, the ‘triple lock’ uprating goes further by guaranteeing that it will rise in line with the highest of the following three: average earnings growth up to September, inflation up to September, or 2.5%. 

Average wages rose by 8.5% in the year to September 2023, which was the higher of the three criteria, so pensioners were given a 8.5% boost to their State Pension in April this year.

It means the State Pension is now worth:

• £221.20 a week, or £11,502 a year for the full, new State Pension.

• £169.50 a week, or £8,814 a year for the full, basic State Pension.

Despite these increases through the Triple Lock guarantee, the adequacy of the above payments in providing a comfortable retirement is frequently debated.

Challenges facing the State Pension

The UK is experiencing significant demographic changes. Our ageing population means that the ratio of working-age individuals to retirees is shrinking, placing immense strain on our State Pension system. 

Despite the set increases to the State Pension age, by 2041, the government’s Future of an Ageing Population report projects that there will be only 2.65 working-age people for every retiree, down from 3.21 in 2012. By 2050 there are expected to be 25% more pensioners than today.

Economic instability, influenced by factors such as the COVID-19 pandemic and the war in Ukraine causing inflation and interest rates to soar, adds another layer of complexity when we consider the triple lock.

However, any proposed changes to the State Pension age or entitlements could be highly controversial, making meaningful reform challenging, especially with a General Election just a few weeks away. For now, both the Conservatives and Labour have both confirmed that they are committed to retaining the triple lock.

Nevertheless, people are spending longer in retirement due to longer life expectancies. This longevity, while a testament to healthcare advancements, may require a re-evaluation of how long and how much the State Pension can feasibly support retirees.

The State Pension is already enormously expensive. According to the Institute of Fiscal Studies, government spending on the State Pension, pension credit and winter fuel payments was expected to total £132 billion in 2023-24 – that’s 5.1% of national income.

Potential future scenarios

So, given the above challenges, what does the future hold for the UK State Pension? Here are a few potential scenarios…

Bring forward the State Pension age increase

The government is already increasing the State Pension age gradually. This approach aims to keep the system sustainable by ensuring people work longer before claiming their pension. There is the possibility of the proposed increases in State Pension age being brought forward, and further increases to follow.

Adjust the triple lock

The triple lock guarantee safeguards the State Pension from inflation erosion. However, following the 10.1% rise in 2023 and an 8.5% boost this April, can the government sustain this method to determine the annual increase? 

One option is that future governments may replace it with a double lock, or a less generous formula. This has been done before. According to the Office for Budget Responsibility, due to pandemic-related effects distorting earnings growth in 2021, the triple lock was temporarily replaced with a double lock which omitted earnings in the 2022-23 year.

Means-testing the State Pension

Whilst introducing means-testing for State Pensions would no doubt be controversial, it would help to ensure that only those in greatest need receive support, with wealthier retirees receiving reduced benefits. This could be one way to allocate resources more effectively to those in need.

Further incentives to increase private pension savings

Encouraging private pension savings through workplace schemes and individual savings accounts can reduce reliance on the State Pension. Auto-enrolment in workplace pensions has been a positive step in getting more individuals contributing to a scheme – but further incentives and education on savings is needed.

For instance, the self-employed fall significantly shorter on their pension savings than their employed counterparts. According to the government website MoneyHelper, there are around 4.5 million self-employed people in the UK, yet just 31% of them are saving into a pension. Encouraging more people, like the self-employed, to put money away for their retirement could make a big difference.

Final thoughts

Whilst we don’t have a crystal ball to predict what the future has in store for the State Pension, it is likely that providing both sustainable and adequate support for retirees will require difficult compromises to be made along the way.

What we do know is that ensuring future generations can enjoy a secure and dignified retirement depends on actions taken now. While the path forward may be uncertain, the conversation about pension reform is necessary and urgent.