State pension age at 71: what it would mean for your retirement

The state pension is rarely far from the headlines. Sometimes it’s for positive reasons, such as the government’s decision last year to keep the triple lock and vault the annual payment to £11,502 from April 2024.

But other times the news is less sanguine, which we saw an example of earlier this week.

According to a report by the International Longevity Centre (ILC), the UK will have to increase the state pension age to 71 by 2050 to ensure it remains sustainable.

It’s fair to say that this suggestion will not win the hearts of workers who would be far from enamoured with the prospect of working longer. What’s more, it arrives the same time as a further report which shows the cost of living comfortably in retirement has rocketed in the past few years.

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Let’s delve into what each piece of research is telling us and explain how it might affect you.

On what basis has the ILC proposed such radical reform?

Well, the ILC has backed its argument using something called the dependency ratio.

This is the percentage of people aged 65 and over relative to the working adult population (aged 15 to 64).

ILC data shows that, at pension age 65, a ratio of 20% equates to five workers per retiree but a ratio of 50%, which is projected for the UK by 2050, means just one worker per retiree.

Professor Les Mayhew, ILC’s associate head of global research, said: “In the UK, state pension age would need to be 70 or 71 compared with 66 now to maintain the status quo of the constant number of workers per state pensioner.”

Mayhew added that this might need to happen as early as 2040 to maintain the current dependency ratio.

It’s a radical proposal – not to mention a political landmine. The retirement plans of millions could be hurled into jeopardy.

The current state pension age is 66 but will rise to 67 and 68 by 2028 and 2044, respectively. The government has no plans to amend this timetable, but if it did implement the ILC's recommendations,  you may have to wait an extra three or even four years to collect your state pension.

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Health is a factor that we must not overlook here. It’s one thing to raise the state pension age, but not everyone will be fit and healthy enough to continue working until their early 70s, especially those doing manual jobs.

As the ILC research found, Europeans who report being in good rather than poor health are more than four times more likely to be in work between the ages of 50 and 65, and 10 times more likely between the ages of 65 and 74.

But improving the nation’s health is no small task, and lifestyle choices aren’t always to blame.

The spiralling cost of retirement living

In the past two years, due to the cost-of-living crisis, the strain on retirement incomes has become markedly heavier as figures from the Pensions and Lifetime Savings Association (PLSA) emphatically underscore. Inflation isn’t the only factor. Changing retirement expectations are playing a role, too.

The table below shows how the PLSA’s Retirement Living Standards (which are split into comfortable, moderate, and minimum) have shifted since 2021. 

The figures were calculated by the Centre for Research in Social Policy at Loughborough University on behalf of the PLSA and are based on in-depth discussion groups with the UK public. They show the annual income needed after tax has been deducted.

Needless to say, the increases are striking, particularly when it comes to striving for a moderate lifestyle in retirement.

Just two years ago, £30,600 a year was deemed enough for a couple to live a moderate lifestyle, which includes an annual two-week foreign holiday and running a car, among other things. But this figure has since vaulted to £43,100 according to PLSA assumptions – a mammoth 41% uptick.

As the report concedes, these figures are generalised. Every individual or couple will have their own idea about what a moderate or comfortable retirement means. Later-life aspirations are a personal thing.

But what also prompts concern are increases to the minimum levels needed. In 2021, an annual income of £10,900 was considered enough for a single person to meet basic retirement needs, but this has since leapt more than 30% to £14,400. It’s worth noting that the personal income tax allowance – the amount you earn every year tax free – is to remain frozen until 2028, which will trip more low earners into paying tax, thus thinning their retirement incomes.

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During the same period, the full state pension has risen from £9,340 a year to £10,600, and will hike to £11,502 from April, thanks to the triple lock.

Despite the value it provides for pensioners, the triple lock has drawn frequent criticism. In December 2023, the Institute for Fiscal Studies (IFS) urged the government to scrap the policy, claiming it “will add considerable pressure on public finances in coming decades”.

What’s clear is that the government has a delicate tightrope to walk, not just with the triple lock but the state pension’s future more broadly.

On one hand, there is no bottomless pit of money to support retirees. As the labour force falls and the retirement population grows, the pressure on national insurance contributions (NICs), which are paid by current workers to fund the state pensions of current retirees, will inevitably exacerbate.

But on the other, the PLSA’s figures illustrate just how valuable the triple lock has been over the past two years, especially for those on low to modest incomes. Many more pensioners would be struggling to make ends meet if the policy had not been honoured.

As the PLSA notes: “The state pension triple lock acts as a crucial safeguard against rising retirement living costs. With a significant 8.5% increase to just over £11,500 annually from April 2024, the state pension remains a substantial foundation of retirement income.”

What level of savings do I need for a comfortable retirement?

Based on the PLSA’s figures, and assuming you buy a level annuity at current rates and pocket the full state pension, a couple need to save £560,000-£900,000 for a comfortable retirement, or £300,000-£500,000 for a moderate one. For a single person, these figures are £490,000-£790,000 and £150,000-£250,000 for comfortable and moderate retirements, respectively.

Importantly, these have been shown in today’s money. Due to the corrosive effects of inflation, the amount you actually need to save may be higher.

What’s more, if the state pension was hiked to 71 but you still plan to retire at age 68, a couple would need an extra £69,012 in savings (£11,502 x 6) to plug the three-year hole.

What can I do to save enough?

While relying solely on the state pension in retirement is a risky approach, it still provides a valuable source of guaranteed, inflation-proofed income to meet your everyday needs.

To make sure you’re on track to receive the full amount, get an up-to-date state pension forecast to check your NIC record (you need 35 qualifying years) is up to scratch. If you have any gaps, the good news is these can be filled, but can’t you go back further than six years.

The next step is to engage with your personal savings as soon as possible. The more time you have to save and invest, the better.

Start by working out how much you’ll need to live the retirement you want. Think about how you’d like to spend your time, and what your living expenses are likely to be.

Once you’ve calculated your target income, using a pension calculator, like this one from interactive investor, it can help you to gauge the level of savings required.

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When it comes to funding your retirement, making the most of your workplace pension is paramount. If you pay 5% of your salary, your employer must contribute 3% - bringing the total to 8%. Plus, you get tax relief on what you pay at your marginal rate.

But sticking to these figures is unlikely to get you where you need to be. The ILC recently argued to increase minimum auto-enrolment levels, a sentiment shared by many others, including the PLSA.

Some employers, however, offer a more generous matching arrangement. For instance, you each pay 7%. This is strongly worth considering as it means your employer will take on more of the heavy lifting. Using salary sacrifice, where you trade a portion of your earnings for a pension payment, means you’ll save NICs as well as income tax.

Finally, make the most of up-front tax relief where possible - particularly if you pay 40% and 45% tax - and keep your pension costs low. These can give your retirement savings a welcome boost.