The Future of the State Pension
In April 2024 the New State Pension (for those who reach(ed) State Pension Age after 5 April 2016) will rise by 8.5% to £221.20 a week. The increase was in line with the triple lock, which fixes the annual increase at the highest of:
The annual growth in earnings in May-July (8.5% in 2023);
Annual CPI inflation to September (6.7% for 2023); and
A 2.5% minimum.
By the time April arrives, 8.5% looks likely to be more than double the rate of price inflation, which had fallen to 3.9% by November.
Source: ONS, DWP, Technical Connection calculations
Will the State Pension survive in its current form?
Recent polling showed that one in three working age people do not believe that the State Pension will exist in 30 years’ time, with those aged 55-64 the most pessimistic. There was even a greater lack of faith that the State Pension would keep pace with inflation over the next decade: only 38% of those surveyed believed it would.
To a degree those pessimistic views are understandable, given the increases to State Pension Age since 2010 and the sidestepping of the triple lock for 2022. However, the Institute for Fiscal Studies (IFS), which commissioned the polling, thinks the gloom is overdone. It points out that the State Pension has risen at least in line with price inflation every year since 1975 and that, in terms of government expenditure, it costs much less than in many other countries. The relatively low cost, partly due to the reforms made since 2010, means that the UK is better placed than many continental countries to continue with something close to its current level of State Pension provision.
One future reform of the UK State Pension, which could well happen, is a redesign of the triple lock. The existing structure has been widely criticised as being too expensive and too unpredictable – since the New State Pension started in 2016, earnings growth has accounted for three increases, as has CPI, while the 2.5% floor was the trigger for two. As the graph illustrates, the net result is a pension which outpaces both earnings and prices, a recipe for long term government funding problems.
The role of the State Pension
The structure of UK pensions is one that has enjoyed a broad political consensus for over a decade. The State Pension is pitched at a basic subsistence level, providing a foundation on which to build private provision, for many in the form of automatic enrolment in workplace pensions. For the poorest retirees, the State Pension is a major source of household income, but even for the highest-income fifth of households, the State Pension makes up nearly a quarter of total income, according to the IFS. Take away that foundation and the pension framework collapses, leaving the government still having to provide a means-tested safety net for the retired poor and creating disincentives to save.
The State Pension is far from adequate for a comfortable retirement and is best thought of as the initial layer of your retirement income (once you reach State Pension Age).
Talk to us about your 2024 options for creating the retirement you want, when you want it to begin.