The past, present and future of the new state pension

This April marks the 10th anniversary of the now not-so-new state pension.

In April 2016, the new flat-rate state pension was introduced, replacing the old – and arguably over-complicated – system.

Prior to this point, the state pension was made up of two components: the basic state pension and the additional state pension – an earnings-related top up (SERPS between 1978 and 2002 and the State Second Pension between 2002 and 2016).

The new state pension is undeniably less complicated – offering a flat-rate pension for everyone that has paid sufficient national insurance contributions (NIC). That’s 35 years for the full amount, or a proportional payment if you’ve paid less than 35 years but more than 10.

• Invest with ii: Open a Low Cost SIPP | What is a SIPP | Interactive investor Offers

While it didn’t represent a better deal for everyone, it has certainly improved the retirement prospects for some – most notably women and the self-employed.

But “protected payments” still provide a top-up for people reaching state pension age after April 2016 to reflect rights that they accrued under the old system.

State pension 2016 vs 2026

When it was first introduced, the new state pension paid a full flat rate of £155.65 a week, or just over £8,000 a year.

But thanks to the triple lock, which was first introduced in 2011 by the coalition government, 10 years on the new deal now pays £241.30 a week – an increase of 55%.

Now retirees can claim a little over £12,500 a year – perilously close to the £12,570 personal allowance for income tax.

As a result, next year the state pension itself will become taxable for the first time (the triple lock means it will rise by at least 2.5% and the personal allowance is frozen until 2031). 

However, earlier this year the government pledged that for the duration of this parliament, retirees whose only income is the new or basic state pension (without increments) will not pay a tax charge. We’re still awaiting the details on how this will work.

• Is an ISA the missing part in your retirement plans?
• Seven tips to save for retirement when you’re self-employed

Changes to the state pension age

The state pension age has changed over the last 10 years too.

In 2016, the state pension age for men and women was still in the process of equalisation.

Men could start claiming their state pension from age 65, while women could claim it from the age of 63 (between 1948 and 2010 the state pension age didn’t change for either gender and was fixed at 65 for men and 60 for women).

By 2020, the state pension age for both men and women had reached 66.

But now the state pension age is rising again. On 6 April this year, it started increasing to 67, a process that will take two years.

Those born between 6 April 1960 and 5 March 1961 will qualify for the state pension between the age of 66 and 67.

For example, someone born between 6 April and 5 May 1960, will be able to claim the state pension at age 66 and one month, while someone born between 6 February and 5 March will get it at age 66 and 11 months.

Meanwhile, people born between 6 March 1961 and 5 April 1977 will be able to claim when they turn 67.

What could change down the line?

The next state pension age increase (to 68) isn’t scheduled to take place until 2044-46. But it could be impacted by the third state pension age review – which is taking place at the moment.

It’s anyone’s guess how the state pension will change over the next decade and beyond.

The Cridland Review in 2017 did call for the next increase to be bought forward to 2037-39. But, while the government at the time did “accept” the recommendation, it hasn’t been acted upon.

As yet, increases beyond age 68 haven’t been formally scheduled. But that’s not to say they won’t happen as the pressure the state pension puts on the public purse continues to mount.

• When will you get your state pension?
• ​​​​​​​State pension changes: are you prepared?

According to the Office for Budget Responsibility (OBR), if a further increase to the state pension age to 69 was implemented during the early 2070s, the cost of funding it would reach almost 8% of GDP, compared to 5% now.

Of course it’s not only the state pension age that could change.

The triple lock also remains highly contentious. It has made a huge difference to retirees’ income, particularly during periods of high inflation, like the cost-of-living crisis. In April 2023, payments rose by a record 10.1% (indexed to Consumer Prices Index, or CPI), followed by a bumper 8.5% increase the following year (indexed to earnings growth).

However, the costs are crippling. The OBR has suggested that spending on the state pension has cost the government £12 billion more a year that it would have had increases just been linked to earnings growth since it was introduced 15 years ago.

In fact, the Adam Smith Institute has gone as far as stating that by 2036, the cost of the state pension will outstrip national insurance revenue, in spite of recent increases to employer NICs.

• How to start accessing your pension the right way
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Labour has guaranteed the triple lock until the end of this parliament. But while there appears to be increasing consensus that something needs to give, if the state pension is to remain sustainable, its value to pensioners is such that it would remain a bold move for any political party to tinker with it too much.

Options on the table include a “smoothed earnings link” as proposed by the Institute for Fiscal Studies (IFS). This would broadly see the pension rise in line with wage growth, but with the ability to link to inflation in years where costs are rising faster.

A more extreme – but less likely - fix is to means test the state pension and withdraw the benefit for wealthier pensioners.

How you can respond to the challenges

It’s not a great outlook, but, if you’re still working, the plus point is that you may have some time to respond to the challenge.

As the age at which you can start claiming that state pension rises, many people will find that they need to work longer – which could be difficult for those in poor health as well as those caring for older family members.

However, people with decent sums saved in workplace or personal pensions such as self-invested personal pensions (SIPP), may be able to use those pots to help bridge the gap between retirement and state pension age.

Keeping pensions invested into retirement (with a drawdown plan) may also provide a degree of inflation protection and help you deal with rising bills, if the triple lock is reined in.

That means private pension provision will become increasingly important. Topping up contributions and paying bonuses into your pension can make a significant difference to your future income, if you can afford it.

You can also boost your retirement finances by giving your pensions a bit of a mid-life MOT.

Simple steps such as consolidating old workplace schemes into one can reduce your costs and potentially grow your pot.

Reviewing your investments and switching into cheaper index-linked funds could also save you money, without necessarily damaging your returns.

But just as it’s important to boost your private pensions, it’s also crucial that you check your entitlement to the state pension; don’t just assume you’ll get the headline amount.

To qualify for the full state pension you’ll need 35 years of contributions either through payments from earnings, or credits if you were claiming certain benefits.

You can find out where you stand by getting a state pension forecast. If you’ve got any gaps, you can plug them by purchasing voluntary NICs. These can be a great value investment, but you can only go back for the last six years, so it’s important to check as soon as you can. Leave it until you’re about to retire and it might be too late to buy back any missing years.