There have been rumours for years that the government could scrap the State Pension. As the cost of maintaining the State Pension soars, more people think they’ll need to create a retirement income without any support from the government.
The National Insurance Act in 1946 introduced a contributory State Pension for all. Yet, almost eight decades later, many workers believe they’ll have to do without it.
A survey from think tank Phoenix Group revealed 1 in 3 people think there probably won’t be a State Pension by the time they retire. This rises to half of workers aged under 50.
Under the current rules, you can claim the State Pension from age 66, but it is gradually rising. By 2046, it is set to reach 68.
To be eligible for the full State Pension, you must have 35 qualifying years on your National Insurance (NI) record. For 2023/24, the full State Pension is £203.85 a week. If you have fewer than 35 years on your NI record, you may receive a portion of the State Pension.
Some of the concerns from younger generations are likely to be linked to reports that the cost of providing the State Pension is unsustainable.
Government spending on the State Pension could rise to almost 10% of national income by the 2070s
If it doesn’t make changes, the government could face a staggering State Pension bill in future.
An ageing population means a greater proportion of adults will be claiming the State Pension in the future. Around 24% of adults in the UK have reached State Pension Age today. According to a report from the Institute for Fiscal Studies, this will rise to 27% in 2050 and 30% in 2070.
The Office for Budget Responsibility expects spending on the State Pension to rise from 5.6% to 9.6% of national income over the next 50 years – that’s the equivalent of £100 billion a year in today’s terms.
Compounding this figure, the report also suggests an ageing population will lead to increased health and social care spending.
So, over the coming decades, the government may make changes to the State Pension in a bid to reduce spending. However, it could leave pensioners with a significant gap in their finances.
2 valuable reasons why the State Pension can be important for your retirement
The State Pension can be an important part of retirement planning for many people for two key reasons.
- It provides a guaranteed income
The State Pension delivers a regular income you can rely on. As a result, it can provide a good foundation, particularly if you don’t have other sources of guaranteed income, such as a defined benefit pension or annuity. The State Pension may provide some reassurance that you can cover essential costs in retirement.
- It rises each tax year
Under the triple lock, the State Pension rises each tax year by the greatest of three measures – the increase in annual earnings year-on-year, inflation, or 2.5%. As rising costs affect how far your money will go, the triple lock can play a vital role in preserving your spending power throughout retirement.
How could the government change the State Pension?
Scrapping the State Pension is just one option the government has. There are other steps it could take to reduce the bill, including:
- Increasing the State Pension Age: Recently, the government announced it wouldn’t accelerate the State Pension Age any quicker than already planned. However, it’s likely to be an area it reviews in the future and it may rise.
- Making the State Pension means-tested: Currently, anyone who has the necessary NI record can claim the State Pension, regardless of their other income or assets. There have been some calls to make all or a portion of the State Pension means-tested, which could lead to some pensioners no longer being eligible to receive it.
- Scrapping the triple lock: Maintaining the triple lock to guarantee the State Pension rises each tax year was an election pledge of the Conservative government. However, after a record increase in 2023/24 due to high inflation, scrapping it could be considered to manage costs.
Create a retirement plan that gives you confidence in the future
While it’s impossible to predict how the State Pension will change over the coming decades, and the role it’ll play in the income of future retirees, you can still take steps to create financial security.
A retirement plan that’s tailored to your aspirations can help you use your assets effectively during your working life and when you retire. Please contact us to talk about your goals and what you might do to feel confident about your later years.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.