State pension age shock as big changes likely sooner than planned

What does the rising state pension age mean for you and your retirement plans?

This morning, the government leaked plans to increase the state pension age faster than planned, saving billions for the Treasury. The move would be a blow for middle-aged workers who could see their private pension pot run out two years earlier as a result.

• Invest with ii: Open a SIPP | Best SIPP Investments | SIPP Withdrawal Rules

The plans mean the government could increase the state pension age to 68 as early as 2034, meaning that those who are currently 57 years old or younger could be waiting an extra year for their state pension to kick in. The full state pension will be worth £10,600 in April 2023, leaving workers with a huge hole to fill.

Accelerated plan

Under current rules, the state pension age is already gradually rising, increasing from 66 to 67 in 2028 and then 67 to 68 between 2044 and 2046, meaning today’s 44 to 45-year-olds need to wait until they’re 68 to receive the state pension.

The new plans would bring forward those changes to 2034, meaning workers who are currently 57-years-old or younger could have to wait until they hit 68 to get their state pension.

A pensions report in 2017 recommended that the state pension age changes were brought forward to 2037 and 2039 but a final decision was deferred to this year. The government's plans will be based on a pensions review, due to report in the next few months.

Some critics argue that the plans are unfair as life expectancies are currently falling rather than rising as previously expected. This means the average Briton will be living less long in retirement and drawing on their state pension for less time.

• State pension age: why changes could leave a hole in your pension
• Is the UK state pension really the worst in Europe?
• How does your pension compare with your neighbour?

Sir Steve Webb, a former pensions minister, commented that: “The last review of state pension ages was based on data which is now more than six years out of date. Since then, life expectancy at pension age for both men and women has dropped by more than two years.

“Such a dramatic shift in such a short space of time calls for a fundamental rethink of the government’s plans for increases in state pension age. With the move to 67 due to start in only four years, [the Department for Work and Pensions] needs to speed up its current review, as the case for rapid increases is simply not justified by the evidence.”

Impact of changes

The expected changes will leave a dent in our pension income if we plan to retire before the state pension age. We’ll need a plan to bridge the gap for another year until the state pension kicks in.

Someone with a £100,000 pension pot who retires at 67 could see their money running out two years earlier, when they reach 79-years-old rather than 81, according to interactive investor calculations. That’s based on them withdrawing an extra £10,600 from their pension pot to cover the shortfall in the first year.

In theory, raising the state pension age means many workers will decide to carry on working for longer. But the reality isn’t always that simple.

Many older workers face health problems, or are working fewer hours due to caring responsibilities.

ii’s 2022 Great British Retirement Survey showed that more than one in five (21%) of 56-to-65-year-olds have cut their hours due to ill health. In addition, 13% of 56-to-65-year-olds have reduced their hours due to caring responsibilities – a responsibility that falls disproportionally on women - 18% of women have cut their hours due to caring responsibilities compared to 7% of men.

One respondent commented that: “You can make all the plans you want, but if you have to give up work to become a full-time carer it all goes out the window.”

Knock-on effect for private pensions

There is potentially a knock-on effect for private pensions from the state pension changes. The government tends to raise private pension access ages in parallel with the state pension, keeping them 10 years below the state pension age.

This means that private pension access ages could rise to 58 for workers who are 47 and younger: they’ll have a wait another year before being able to take a lump sum or draw an income from their private pension pot.

• 10 essential things to know about pension tax relief
• Will overpaying my mortgage or pension make me richer?
• Are these seven baby steps the secret to a wealthy retirement?

If you’re planning to retire early, you may need to push back your plans, supplement your pension income with a stocks and shares ISA, or save a little bit harder to make that dream a reality.