State pension age dance continues as plans shelved for now

The future is far from certain and the 'will they, won’t they' dance on the state pension age is due to continue, says Alice Guy.

Alice Guy: “With the highest tax burden on record, the government is walking a tightrope between the affordability of the state pension and giving confidence and hope to those planning for retirement.”

Interactive investor calls for more certainty on the state pension age, as another review is announced in two years after the next Parliament.

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The government today announced the conclusion of the Second State Pension age review conducted by Baroness Neville-Rolfe, which is a six-yearly regular independent report.

The report has concluded that the current state pension age rules will remain in place, with another review to be conducted sooner than planned in two years after the next Parliament. This gives time to review long-term mortality trends and assess the long-term impact of the Covid pandemic and cost-of-living crisis on life expectancies.

The report recommends the state pension age change to 68 is brought in three years earlier than the current rules in 2041 to 2043. This would mean someone currently aged 49 or younger could see their state pension age rise in the future.

Under the current law, the state pension age will rise from 66 to 67 between 2026 to 2028, and then 68 between 2044 and 2046. However, the government was rumoured to be considering making the change even earlier, with some reports citing a rise in state pension age to 68 as early as 2034. These plans have now been shelved with decision due in two years after the next Parliament.

Alice Guy, Head of Pensions and Savings at interactive investor says: “With the highest tax burden on record, the government is walking a tightrope between the affordability of the state pension and giving confidence and hope to those planning for retirement.

“The Office for Budget Responsibility estimate that the costs of the state pension will increase from 4.8% of Gross Domestic Product in 2021-22 to 8.1% of GDP in 2071-72 and that’s a big headache for the government and will doubtless affect their future decisions.

“The decision is a reprieve for private pension savers, many of whom were worried about needed to make their private pension pot stretch further for longer.

“But while the decision appears to provide clarity, the future is far from certain and the “will they, won’t they” dance on the state pension age is due to continue. The can has simply been kicked down the road leaving millions of workers in the dark about their exact state pension age. The report concludes that the state pension age change to 68 should be brought in three years earlier, leaving workers aged 45 to 49 in suspense until a decision is made in two years after the next Parliament.

“It’s important to have certainty when you’re planning for retirement as it takes years to save enough for a comfortable retirement – people need to know what goal posts to aim for. As a society we need to take care of our older workers and giving them certainty will help them achieve a dignified and planned retirement.”

“It’s also important to remember that many workers simply aren’t well enough or don’t have the energy to work into their late 60s. Many people work in physical jobs and need to be able to work outdoors in all weathers. Others in their 60s, disproportionately women, take time out from the workplace to care for loved ones and have to survive on a minimal income.”

Interactive investor calculations show that middle-aged workers could see their retirement income swell by £17,000 due to the state pension age rise being put on ice.

The decision is also great news for private pension savers:

• The minimum private pension age you can access your private pension is linked to the state pension age and will be 10 years earlier than the state pension age from 2028, meaning that any rise in state pension age would mean private pension savers needing to wait longer before accessing their private pension.
• A later state pension age means drawing on your private pension for less time and losing one year of state pension could mean your private pension pot runs out two years earlier, according to interactive investor calculations.

Calculations by interactive investor show that bringing forward the state pension age increase from 68 by 2046 to 68 by 2034 would mean a year lost full state pension payment of £13,594 for workers aged 57 rising to £16,902 for workers aged 46.

The calculations factor in the new full state pension of £203.85 per week (£10,600 over the year) and assumes an inflation-linked uprating of 5.2% (forecasted by the Bank of England) and 2% inflation a year thereafter (the Bank of England’s target inflation rate).

Potential lost year of full state pension payments if the government state pension age increases from 68 by 2046 to 68 by 2034. Assumes a 5.2% inflation uprating in 2023 and 2% annual rise thereafter.