In 2022, the basic State Pension will rise to £141.85 a week, whilst the new State Pension will be £185.15. The latter is only payable to people who reached the State Pension Age (SPA) after 6 April 2016. Official statistics show that 57% of an average single retiree’s gross income is made up of the State Pension. The figure goes down to 37% for a pensioner couple.
In comparison, income from work-related pensions account for 27% and 32% for a single retiree and couples, respectively. Currently, a significant proportion of pensioners are depending on regular State Pension payments. However, it is widely acknowledged that this is not enough to live on.
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What does the government plan for the State Pension Age?
The next State Pension Age review was announced by the government last month. Currently, the plan includes two increases. The first is due to take place between 2026 and 2028, and the second between 2044 and 2046. These will increase the SPA from 66 to 68 over two periods. However, the last review in 2017, proposed for the plans to be brought forward to 2037 and 2039.
Since 2000, the State pension has seen a three-fold increase, and it currently costs UK taxpayers over £100 billion. The International Longevity Centre-UK (ILC) argues there could be a way to keep the costs down. According to the think-tank, an increase in the State Pension age could prevent costs from rising further. That said, the way this is calculated will prove instrumental.
What are the alternatives?
The ILC provides a comparison of the costs and timetables of setting the State Pension age up to 2045. This was done by utilising life expectancy data that was based on the latest ONS national projections and the year of birth:
1. Spending the same number of years in retirement as previous generations
The first option is for future generations to spend the same number of years in retirement as previous generations – on average, 22.5 years. This means that an increase in the State Pension age to 68 would come two to four years earlier than currently planned (around 2041). Also, this would save the government somewhere between 5%-6% more than the current plan.
2. Keeping a constant ratio between people in work and those at or above the State Pension age
“Fiscal balance between taxpayers and pensioners” is what this second option is all about. With it, a rise in the State Pension age would come significantly quicker than current plans, with increases to 68 by 2031, 69 by 2034 and 70 by 2040. The savings would also increase significantly after 2030, reaching 16% by 2040.
3. Spending a third of adult life as a retiree
This third option would deliver the slowest increase in the State Pension age, reaching age 67 in 2040. However, in comparison to current plans, this option will represent a higher financial burden for the government, being 7% more expensive between 2027 and 2033.
4. Link the increase in life expectancy to increases in the State Pension age
This method would be cheaper than current plans, with a 6% saving after 2030 that could rise to between 12% and 16% after 2035. This would involve maintaining the current proportion of the population to reach and live beyond pensionable age (85.5%). This means the State Pension age would reach 68 by 2032, 69 by 2038 and 70 by 2042.
No matter what, the next State Pension Age Review will likely impact everyone in the UK. According to Professor Les Mayhew, head of global research at ILC, for the State Pension age to be “intergenerationally fair and fiscally sustainable”, we are likely looking at another increase between 2030 and 2045.
So, in reality, the question is not ‘if’ but rather ‘when’ and ‘by how much’.