If you’ve yet to retire, you may give little thought to the State Pension. But the government is currently reviewing it, which could mean millions of people will need to wait longer than expected until they can claim it.
The State Pension Age is now equalised for men and women and is currently 66, but there is already a gradual increase planned. By 2046, the State Pension Age will reach 68 for those born on or after 1 April 1977. Once you reach State Pension Age, you can begin to claim your State Pension, which will then provide an income for the rest of your life. The full State Pension for the 2022/23 tax year is £185.15 a week (£9,339.20 a year), although the actual amount you receive will depend on your National Insurance record.
The State Pension Age has slowly increased in line with rising life expectancy, but so has the cost for the government. According to the Office for Budget Responsibility, State Pensions are the biggest item in the social security budget. In the 2018/19 tax year, the department estimated that the State Pension cost £96.6 billion.
Against a backdrop of tightening fiscal policies following the Covid-19 pandemic, the government has now launched a second State Pension Age review.
What will the review look at?
The review will focus on whether rules around the State Pension Age are appropriate, based on life expectancy data and other evidence.
The government said: “As the number of people over State Pension Age increases, due to a growing population and people on average living longer, the government needs to make sure that decisions on how it manages its costs are robust, fair and transparent for taxpayers now and in the future.
“It must also ensure that as the population becomes older, the State Pension continues to provide the foundation for retirement planning and financial security.”
While nothing has been confirmed, there has been speculation that the State Pension Age will rise further or at a faster pace than currently expected. The results of the review will be published by 7 May 2023.
Life expectancy figures from the Office for National Statistics suggest that men reaching 66 this year have an average life expectancy of 85 years, meaning they’d be claiming the State Pension for 19 years. With a 1 in 10 chance of reaching 96, a significant portion will claim the State Pension for an extra decade. For women aged 66, the average life expectancy is 87, with a 1 in 10 chance of celebrating their 98th birthday. The review will look at whether the State Pension is sustainable when considering life expectancy predictions.
The review could also prompt a look at the State Pension triple lock. The triple lock guarantees that the State Pension will rise each tax year by either average wage growth, inflation, or 2.5%, whichever is highest.
However, Covid-19 has put the triple lock under pressure. For the 2022/23 tax year, the wage growth data was not used, as furlough meant many incomes fell in 2020, leading to a rise of more than 8% in 2021. As a result, the triple lock was temporarily suspended, and the State Pension will rise by a more modest 3.1% in April 2022.
Amendments to the triple lock policy would breach the Conservatives’ election manifesto, but that doesn’t mean changes can be ruled out.
Why the review could affect your retirement plans
The State Pension provides a foundation to build your retirement income. While you may have pensions or other assets you plan to use to fund retirement, the State Pension is still likely to play an important role.
If you’re not able to claim the State Pension when you expect, it could mean you need to delay retirement plans or reduce your income so your other assets can stretch further. Understanding the review and the changes the government could make can help you create a retirement plan that you have confidence in. That could mean saving more during your working life to create a larger financial buffer or reviewing your pension so you can have confidence in the income they’ll provide in retirement, even if changes occur.
If you have concerns about your retirement or would like to work with a professional to organise your pension and other assets, please contact us. We’ll help you get to grips with your pension now, and can schedule regular reviews so you know you’re taking steps to keep your retirement on track, even if the State Pension review leads to changes.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.