State pension age could rise earlier than planned

We're warned the state age pension age could rise to 67 earlier than currently planned as the government looks for cost savings. 

With government debt at record levels, Prime Minister Liz Truss is under pressure to find cost savings. And the state pension, costing over £100 billion every year could be in her sights.

At the Tory party conference this week, Truss was asked if she would raise the state pension age beyond 67. Her answer was evasive, saying: "You're asking me to speculate [on] all kinds of decisions that haven't yet been made,” suggesting that a change could be coming.

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Raising the state pension age could save the government an estimated £5 billion and Truss has limited other options. The much-publicised Triple Lock guarantees the state pension will rise in line with the highest of inflation, earnings and 2.5%. This, combined with an aging population, means the total state pension bill grows ever bigger.

Current rules

The current state pension age is 66, but that’s due to rise to 67 between 2026 and 2028, and to 68 between 2044 and 2046.

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That means if you’re 43 or under, you will have to wait until you’re 68 years old to receive the state pension, and if you’re 60 you’ll only get the state pension when you turn 67. If you’re currently just over 43 or 60, you will need to check the state pension website as your state pension age will depend on your birthday.

Government review

The government's pensions review, led by Baroness Neville-Rolfe, is due to report in May 2023, and it is likely to recommend increasing the state pension age more quickly.

The review will look at people’s life expectancy compared to the years they spend in retirement. It’s based on the idea that people should only spend one-third of their life in retirement on average.

The last review in 2017 suggested bringing forward the age changes to 2037-39, meaning that today’s 50-year-olds would also have to wait until they turn 68 to get their state pension.

Rebecca O’Connor, interactive investor's Head of Pensions and Savings, commented that: “policymakers using long-term rising life expectancy as a justification for this need to be very careful. There is massive regional inequality in life expectancy, so people in some parts of the country would miss out more than others. It is also important to bear in mind that average healthy life expectancy, the age at which people typically suffer an age-related health issue that might stop them working, is 63.”

Pensioners caught short

For investors, the problem is that moving goalposts makes it difficult to plan. People make retirement plans years in advance and often base their financial calculations on the current state pension age.

The state pension age gradually climbed from 65 to 66 between December 2018 and October 2020, but many people still retire in their early sixties. Working until the state pension age is sometimes easier said than done. Many have their heart set on retiring by the time they hit 65, and some have health problems that making working for longer extremely difficult.

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O’Connor says: “In potentially raising the state pension entitlement age further, sooner, the Government risks condemning a large swathe of people to poor retirement outcomes and possibly poorer health outcomes, too, by forcing people to work for longer. 

“Without more support from employers for older workers, they might not be able to work anyway, and find themselves on working age benefits in later life, in the run up to receiving the state pension.”

Retirement planning

With more possible changes on the horizon, it’s important to keep an eye on your state pension age as part of your retirement planning.

If you want to retire at 65 years old, then you’ll have to make up any state pension shortfall until you reach state pension age. That means your pension pot will need to be bigger than someone who delays retirement until the state pension age.

The state pension is currently just under £10,000 and is due to rise to over £10,000 in April 2023. That’s a big difference to make up from your private pension pot if you decide to retire before the state pension age.

If you’re due to get state pension at 68, and plan to retire at 65, you’ll need to take an extra £30,000 from your pension pot to cover the state pension shortfall. That £30,000 could have a long-term impact on your investment wealth as you’ll miss out on long-term investment returns on any withdrawals.

In contrast, someone who worked up to state pension age and left their money invested, could see that £30,000 grow to £81,379 by the time they reach 85-years-old, reducing the likelihood their pension pot runs out later in retirement.

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For those approaching retirement, it’s a nervous time. Many private pensions have been negatively affected by stock market volatility, and an increased state pension age would add to the woes millions of older workers. All eyes will be on the government as the Neville-Rolfe pension review reports next year and a final decision is made on the state pension age.