A plan to hasten the state pension age rise to 68 by 2035 has sparked warnings that ill and poor people and carers will bear the brunt of the hike.
Younger generations are also likely to struggle, as industry analysis reveals the state pension plus minimum auto enrolment savings mean they will barely scrape together a decent income in old age.
Men and women’s state pension age is now 66 and between 2026 and 2028 it will rise again to 67.
But the Government will reportedly announce an earlier-than-expected state pension increase to 68, possibly in the Budget on 15 March, in a move that would affect those born between 1968 and 1979.
State pension age rise: Ill and poor people and carers will bear the brunt of the decision, says Age UK
This would mean those aged between roughly 43 and 54 would face working for longer.
It comes at a time when warnings have been sounded that generations due to retire in decades to come will face a gap between income that pension savings and the state pension will provide and what they need to live even a moderate retirement.
Officially, the rise to 68 is set to happen between 2044 and 2046, but a previous Government review recommended the change should be brought forward to 2037-2039 – and it is currently having another look at the state pension age.
‘News reports that a decision may have already been made by the Government on further increasing state pension age are extremely worrying,’ says Caroline Abrahams, charity director at Age UK, adding there is ‘no justification’ for it.
Her organisation has just published a report on people in their 50s and 60s who will be reliant on the state pension, which claims the move could have devastating consequences for them.
‘The people who will lose out the most are those unable to work due to ill health and caring responsibilities, as well as anyone who becomes unemployed in mid-life and then finds it impossible to get another job, due in part to a lack of training opportunities as well as rampant ageism in the labour market,’ says Abrahams.
Life expectancy has stalled. Bringing it forward again now would just be a cost-saving exercise – there is no justification for it
‘As things stand, any decision by the Government to make today’s 50-somethings wait longer for their state pension will consign hundreds of thousands of people to a difficult and impoverished later life.’
Aside from the rise in the state pension age, another looming challenge for savers is that the minimum age to tap private pensions will rise from 55 to 57 in 2028.
Steve Webb, former pensions minister and This is Money’s retirement columnist, said: ‘The last review, which brought things forward by seven years, was based on the assumption that life expectancy would have increased by two years.
‘But life expectancy has stalled. Bringing it forward again now would just be a cost-saving exercise – there is no justification for it.’
What does the Government say?
A Department for Work and Pensions spokesperson says: ‘The Government is required by law to regularly review the state pension age, the second of which will be published later this year.’
It notes that people over state pension age and on a low income may be eligible for pension credit – find out how to apply here.
The average pension credit award is worth more than £3,500 a year and it opens access to many other benefits, such as help with housing costs, council tax or heating bills, and extra cost of living payments.
Six in 10 risk missing out on ‘adequate’ retirement
The state pension is not enough to live on comfortably and current auto-enrolment contribution levels are too low, savers are being warned.
The state pension age controversy follows an influential industry report which laid bare what annual incomes people need for a minimum, moderate or comfortable retirement.
Those with a full state pension will still struggle financially, and need to save substantial private pension pots to achieve a decent income in retirement – see the box below.
Meanwhile, MPs are also sounding the alarm that minimum savings levels under auto enrolment are too low. This is putting more than 60 per cent of people at risk of missing out on an adequate standard of living in retirement, they say.
The minimum is currently 8 per cent of someone’s salary in a band between £6,240 and £50,270, with contributions split between workers, employers and tax relief from the Government.
The Government was accused earlier this week of ‘tinkering around the edges’ with ‘nudging’ initiatives rather than tackling the problem of under-saving head on, by chairman of the work and pensions committee Stephen Timms MP.
He decried the Government’s rejection of his call to raise auto enrolment minimums. That was despite the Government’s acknowledgement to his committee that: ‘Current statutory contributions of 8 per cent on a band of earnings are unlikely to give all individuals the retirement to which they aspire.’
There are concerns that raising auto enrolment minimums could cause more workers to stop saving into pensions, especially at a time of soaring household bills. However, the opt-out rate remained low even during the pandemic.
Meanwhile, hiking minimums would also increase the Government’s pension tax relief bill at a time of straitened public finances.
Pension experts have warned for years that the Government could choose at some point to slash generous tax relief payments into pensions to drum up billions in extra cash for other spending priorities.
The phasing out of salary-related pensions – which provide guaranteed payments until you die – in the private sector has made people more dependent on the state pension, and on auto enrolment schemes where savings are invested to provide a pot of money at retirement.
> When will you reach state pension age: Read our guide here
How much do YOU need for a decent retirement?
The state pension age controversy follows an influential industry report which found the cost of a modest retirement has jumped a staggering 18 per cent to £12,800 for a single person and 19 per cent to £19,900 for a couple.
Two full state pensions, worth £10,600 per person from April, would just about get a couple to that level.
But a single person would need a further income of £2,200 a year, requiring private pension savings of £36,500 on top to achieve it.
People aspiring to a moderately comfortable lifestyle in old age would need £23,300 if single, requiring a state pension plus a savings pot of £248,000, or £34,000 with a partner, if they both had state pensions and pots worth £121,000 at retirement.
A comfortable lifestyle, with luxury treats and holidays, requires £37,300 for one person and £54,500 for two.
A couple both getting full new state pensions would also need retirement pots of £328,000 each, while a single person would need to save £530,000.
Source: Pensions and Lifetime Savings Association’s latest influential Retirement Living Standards report
What impact would an early state pension age rise to 68 have on older people?
Millions will be condemned to a ‘miserable and impoverished’ run up to retirement and often beyond too if the state pension age rise is hastened, claims Age UK.
It says people should be individually notified of any changes in their state pension age at least 10 years ahead, and there should be at least a decade between any changes.
‘Once people are within 10 years of state pension age they should be given a clear commitment that it will not rise again,’ adds Age UK.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
Some 3.5 million people aged 50-64 are currently deemed ‘economically inactive’ in official statistics, but of these 1.3million are sick and 0.5million are caring for family and home, according to the charity.
Many among them also have limited savings, with an estimated 1.5million having less than £5,000 put by, and 120,000 having no savings at all, it says.
‘This really matters because we know that people who are unable to work in the run up to their state pension age often have to draw down savings put by their retirements, to make ends meet,’ the charity says.
‘If there are few or no savings to use then their prospects of a modest but dignified lifestyle during their pre-retirement years are bleak.
‘They will also likely be condemned to penny-pinching retirements, because the money they had saved to help bolster their incomes will have been spent.’
Age UK notes that many people are in poor health by the time they reach the current state pension age of 66, because average healthy life expectancy in the UK is 62.8 years for men and 63.6 for women.
It cites research by the Institute for Fiscal Studies which found increasing the state pension age from 65 to 66 led to a more than doubling of the rate of poverty among 65 year olds, from 10 per cent to 24 per cent.
And it adds: ‘Worryingly, improvements in life expectancy have faltered while inequality seems to be increasing.
‘Life is very difficult for many people in the 50-64 year age group who are in low-paid work or not in work at all. Some older carers are trying to juggle work and care, while others have had to stop working altogether to become full-time carers and have suffered financially as a result.
‘Other people are unable to work due to ill health or disability, are currently working but struggling to keep going as their health deteriorates or are finding it difficult to get a job again after a period out of the labour market.’
Age UK interviewed people in the run-up to retirement who were aware that the state pension age was around 66 or 67, but it found few had looked into the exact timing or what they would get.
The reasons they gave included that they were focused on simply getting by day-to-day on a low income, sometimes with additional pressures of ill health or caring responsibilities.
Age UK says they also showed ‘fatalism that there was little they could do to change their current or future financial position’ and they avoided thinking about retirement ‘because of fear and other negative connotations’.
They expected that ‘if things change, they will change for the worse’ and lacked knowledge about where to get trusted information, the charity added.
Age UK called on the Government to improve employment support and opportunities for those who can stay in employment until their state pension age, and provide better support for those who cannot.
‘There is a strong case for early access to the full rate of state pension for carers and ill or disabled people in some limited, clearly specified circumstances,’ it says.
‘There should also be changes to means-tested benefits to support a wider group of people on low incomes who are approaching their state pension age, to ease their transition to retirement if they are unable to work or can’t find work.’
Will you be able to afford the retirement you want?
What do you picture in retirement? Is it an early exit from the rat race to travel the world, a gradual step back and a bit of golf, or working until state pension age and then spending some time treating the grandchildren?
We will all have a different image in our heads of what our retirement years might look like, but whatever that is it is important to think about another question: could you afford to do those things?
Stepping into that gap is the now regular report from the Pension and Lifetime Savings Association, which helps paint a picture of what a minimum, moderate and comfortable retirement would look like – and crucially what it would cost.
On this podcast, Georgie Frost, Simon Lambert and This is Money’s pension and investment editor, Tanya Jefferies, delve into the report and look at what it found.
Press play to listen on the player above, or listen at Apple Podcasts, Audioboom, YouTube and Spotify or visit our This is Money Podcast page.