Will the state pension exist when you retire?

The state pension was back in the news last week, with fresh doubts cast on whether it remains sustainable.

On Wednesday 10 August, the Times reported that the costs to keep it going are spiralling. According to government figures, costs leapt £6 billion last year to £110 billion, and are set to hit £135 billion by 2025.

This means the state pension will become more expensive than the Department for Education, Home Office, and Ministry of Defence combined.

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So, why are the costs increasingly so sharply? Well, while the percentage of the population in retirement has swelled to 19%, the labour force has shrunk, with this trend set to continue. As the state pension is funded by current workers’ National Insurance (NI) contributions, with every passing year there is less money to spread around more people.

These concerns have seeped into public sentiment. According to a poll by the abrdn Financial Fairness Trust and Institute for Fiscal Studies (IFS), published last week, only 11% of workers believe the state pension will “definitely exist” in 30 years’ time, while a third believe it will not.

While this may be overly pessimistic, we know with some certainty that the state pension will be different by the 2050s. For starters, the state pension age is rising to 67 between 2026 and 2028, and to 68 after 2044.

However, rumours emerged earlier this year that the timetable to age 68 could be brought forward to the middle of 2030. This would cause many current workers to miss out on a year’s state pension income, which could be upwards of £10,000 in today’s money. Not an insignificant sum, and an extra hurdle to the challenge of securing sufficient income to retire on; a challenge that many continue to struggle with.

That said, in my view at least, the chances of the state pension being scrapped are still remote, given how heavily so many retirees rely on it. The one thing that’s less certain is how old you will have to be before you get it. Earlier this year, the IFS said that increasing the state pension age to 70 by 2050 was the only way to keep it going.

Is the triple lock under threat?

The triple lock has gained plenty of attention over the past few years, and for good reason. It guarantees that the state pension will increase every year in line with the higher of inflation, 2.5% or average wage increases.

It’s clearly a good deal for pensioners, but expensive for the government. ONS wages data and Bank of England inflation forecasts show that costs could hit £9 billion in 2024-25.

To alleviate some pressure on its purse strings, the government may want to give the triple lock the elbow. But right now, it is stuck between a rock and hard place.

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On one hand, many feel that it’s unsustainable. Critics include Lord Hague of Richmond, who warned in June that it should be scrapped, with funding directed to healthcare instead. 

But on the other, with the cost-of-living crisis continuing to squeeze the nation’s finances, if the state pension doesn’t keep up with price rises, many pensioners could struggle to make ends meet. There’s also the small matter of a general election next year and kiboshing the triple lock would not be popular with older voters.

For this reason, it seems likely, and perhaps necessary, that the triple lock will remain for the 2024-25 tax year, with a 7% increase on the cards due to high inflation. But its long-term future remains precarious.

It is possible that the government will switch to a double lock at some point, something it has done in the past, albeit temporarily.

In the 2021-22 tax year, the earnings element was abandoned due to artificially skewed wage rises during Covid, which otherwise would’ve boosted the state pension by 8%. Instead, it rose 3.1% in line with the consumer prices index, almost 5 percentage points lower.

Can you rely on the state pension in retirement?

The short answer to this is no.

The Pensions and Lifetime Savings Association (PLSA) recently crunched the numbers and split the findings into three retirement lifestyle categories: minimum, moderate, and comfortable.

As the bare minimum, a single person would need to receive £12,800 a year, or £19,800 for a couple. This would cover basic living needs, plus a bit left over for fun activities.

If you aspire to a moderate lifestyle in retirement, which would allow a foreign holiday once a year and more financial security, you will need an income of £23,300 a year if you’re single, and £34,000 if you’re a couple.

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For those who require more comfort and luxury in later life, the annual income required rises to £37,300 and £54,500 for single people and couples, respectively. This would enable you to be more flexible and spontaneous with your finances.

As the full state pension is currently £10,600 a year, after receiving a bumper inflationary boost of 10.1% in April, if a couple each has at least 35 qualifying NI years to get the full amount, it is possible to rely on the state pension. But you would have to be content with scraping by. Simply put, you’d have enough money to cover the bills, but probably not  to run a car.

As we’ve seen during the cost-of-living crisis, it’s important that your retirement income has plenty of wiggle room to protect your lifestyle from personal and economic changes.

How much do you need to save for a moderate or comfortable retirement?

As the PLSA’s figures show, the state pension alone isn’t enough to secure even a moderate retirement. If this is what you aspire to, you will need to beef up your personal retirement savings.

Let’s explore how to hit the PLSA’s targets for moderate and comfortable and work out how much you need to save to get there. For simplicity, I’ve assumed eligibility for the full state pension.

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So, for a moderate lifestyle you need £23,300, which after taking into consideration the state pension, leaves an income shortfall of £12,700. If we assume a savings pot would generate 5% income, you’ll need to tuck away £254,000.

If you’d like a more comfortable retirement, your income shortfall rises to £26,700, which would require a fund of £534,000.

It’s worth noting that these calculations do not take account of inflation - which reduces the buying power of your money over time - so the sum you need to save will be bigger.

How do you get there?

While it’s never too late to start saving for your retirement, the sooner you can get going the better.

If you’re 35 years old, aim to retire at 68 and need to build a pot of £600,000, you will need to save around £600 a month to hit your target, assuming 5% investment growth.

However, if you waited 10 years, paying the same monthly amount of £600 would accrue £310,000, around half your required pot size.

This is called the cost of delay, and it affects you in two ways. First, as you’re starting later, you lose years of contributions, which in this scenario would equate to £72,000. Second, as the money is invested for a shorter period, you gain less benefit from the power of compound returns. This is where you not only earn money on your original investments, but also on your accumulated growth. And the longer you invest for, the quicker this accelerates.

If you need to save for your retirement and are unsure what to do, a good place to start is with your pension. If you’re employed and pay 5% of your salary into a pension, your employer must pay in 3%. Some will offer to pay in more.

Your contributions also get income tax relief at your marginal rate, which could be 20%, 40% or 45%, plus your money grows free from capital gains tax.

Engaging with your personal and workplace retirement savings is crucial. It will enable your future to remain in your own hands, whatever happens to the state pension.