The government is being urged to never means-test the state pension as part of a series of proposals designed to make the pension system “fit for the next generation”.
The Institute for Fiscal Studies (IFS), a leading thinktank, also says the state pension triple lock should eventually be scrapped, and higher earners should pay more into their workplace pensions.
Under the triple lock, the state pension is increased every year by the highest of inflation, average earnings growth or 2.5%.
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The IFS has concluded its long-running Pensions Review with a blueprint aimed at addressing what it calls “serious challenges facing the UK pension system and substantial risks to the finances of future generations of pensioners”.
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It includes changing how we raise the state pension age, widening the scope of auto-enrolment so that all employees aged 16 to 74 receive an employer pension contribution, and helping people manage pension wealth in retirement.
A previous report, published in September 2024, explained how higher earners should be made to pay more into their pensions.
David Gauke, former secretary of state for work and pensions and chair of the steering group of the Pensions Review, says the final report “comes at the perfect time with the government’s own review expected to commence imminently”.
He adds that the recommendations “maintain an important balance between the state, employers and workers”.
According to Paul Johnson, director of the IFS and co-director of the Pensions Review, while there is much to celebrate about the current UK pensions system, “there is a risk that policymakers have become complacent when it comes to pensions”.
He comments: “Our recommendations give the government a clear and affordable roadmap: shore up the state pension, help workers save more – but only in periods when they are better placed to do so – and help individuals to make the most of their pension pots through retirement. Taken together, they would create a pension system fit for the next generation.”
What are the proposals to overhaul pensions?
The Pensions Review, led by the IFS in partnership with abrdn Financial Fairness Trust, highlights a series of problems for the next generation of pensioners.
For example, fewer retirees will benefit from the advantages of generous defined benefit pensions, and more older people live in expensive, insecure, private rented accommodation.
At the same time, there is pressure on public finances from an ageing population, and many workers are failing to save enough for a comfortable retirement.
With this in mind, it is pushing for the following reforms:
- The government should choose a target level of the new state pension as a fraction of economy-wide average earnings (currently it is worth 30% of average full-time earnings). It could use the triple lock to reach that target, but then the triple lock would be scrapped. Instead, the state pension would rise in line with the higher of inflation or average earnings growth in future.
- A commitment to never means-testing the state pension. The full new state pension is worth £230.25 a week - or nearly £12,000 a year - and is paid to people regardless of their income or assets. The main criteria is the number of qualifying National Insurance contributions an individual has: if you have at least 35 years’ worth, you get the full state pension; those with between 10 and 34 receive a partial amount; those with less than 10 receive nothing.
- The state pension age should only rise as longevity at older ages rises. But it should rise by less than those increases in longevity, meaning the average time spent receiving the state pension would still increase.
- All employees (aged 16–74) should receive at least an employer pension contribution worth 3% of their total pay - even if the employee does not contribute. Currently, auto-enrolment only covers those from 22 to state pension age.
- The minimum default total pension contributions under automatic enrolment in particular for those on average earnings and above should rise. For employees earning at least £10,000 per year, the minimum default total contribution would equal 3% of £9,000 (£270), plus 10% of the portion of earnings between £9,000 and £90,000. This means for a worker on £35,000 a year, the contribution would increase by about £570 per year, from £2,300 to £2,870.
- A new mechanism to facilitate pension saving by the self-employed should be introduced, such as integrating pension contributions into self-assessment tax returns.
- Universal Credit should be boosted for people within one year of their state pension age, either for all on low incomes and assets (costing £600 million a year) or targeted towards those with health conditions (costing £200 million a year).
- Housing benefit should be increased for pensioners living in the private rented sector, so they are provided with support based on the local rents of (at least) a two-bedroom property (initially costing £150 million per year).
- The automatic consolidation of small deferred pension pots should be expanded, especially for those approaching (or above) the state pension age.
- Flexible but protective default retirement income products should be encouraged, such as “flex then fix” approaches combining the flexibility of ‘drawdown’ earlier in retirement with the security of annuities (which provide a regular income for life) at older ages.
- Ensure people can access high-quality information and support without having to pay for expensive and ongoing financial advice, along the lines of the Financial Conduct Authority’s recent proposals for targeted support.
According to the Pensions Review, the recommendations would bring an additional five million employees into pension saving and would significantly boost retirement incomes for those on low-to-middle incomes.
What do pension experts think about the proposals?
Rory Marsh, workplace pension director at Royal London, calls the report’s findings “a timely contribution to the conversation to improve retirement provision, especially as the government will shortly publish more details about its own review of retirement adequacy”.
He adds: “The report rightly identifies the crucial role that workplace pension schemes play to support people in saving for their retirement, and the importance of the employer-employee partnership.
“It also emphasises the need for targeted support to bridge the gap between guidance and advice so more people access the support they need when it comes to saving for retirement. This is something we are keen to advocate for, so people are able to make better informed decisions at key life stages.”
Mike Ambery, retirement savings director at Standard Life, comments: “With the state pension accounting for a significant proportion of all welfare spending, the report highlights the risk that the state pension age could be pushed back further to maintain affordability.
“We agree that there are issues here and people’s ability to keep working haven’t necessarily kept pace with increases in state pension age, as evidenced by the rise in poverty levels among those in their early 60s.”
