The state pension may not be sustainable, with savers needing to make their own private provision in order to cover the costs of retirement, industry figures have warned.
For many of us the state pension is a central aspect of our retirement planning, with recent years seeing substantial increases to the amount paid courtesy of the triple lock.
However, with official figures showing the fund used to pay for the pension could be at risk of running dry within the next couple of decades, warnings have been raised around whether the state pension can truly be relied upon.
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WILL THE NATIONAL INSURANCE FUND RUN OUT OF MONEY?
This week the Government’s Actuary Department (GAD) released an update on the National Insurance Fund. This fund is what is used to pay for a host of state benefits, including the state pension.
Each year these benefits are increased, generally in line with inflation though in the case of the state pension the driver is the triple lock mechanism which ensures that pensions increase by 2.5%, the rate of inflation or the rate of wage growth, whichever is higher.
This uprating process is set to increase the total spending on the payment of these benefits by £10.8 billion. However, that is £3.2 billion higher than the expected level of receipts into the fund.
According to the GAD, the overall balance of the fund is expected to continue to fall in each year of the projection period, which covers up to 2028-29, because of that continued imbalance between the sums being paid out and what is coming in.
Financial services firm Broadstone pointed out that with the expected increase in the number of people receiving the state pension in the years ahead, given the UK’s continued ageing population, this imbalance is only going to become more pronounced in the years ahead.
In fact, without additional financing, the fund could run dry within the next 20 years.
Damon Hopkins, head of DC and workplace savings at Broadstone, said that the figures reveal the “growing burden” of the state pension on public finances, and suggested the government should be concerned about the future viability of the National Insurance fund.
He added: “While it would be a significant political risk to endanger the triple lock now, its current format could be increasingly challenging for the Treasury to sustain. For workers, it emphasises the ever-increasing necessity of building up adequate personal pension savings to ensure a decent standard of living in later life.”
INCREASING THE STATE PENSION AGE
This will mean workers have to wait longer before claiming the payments, and save the Treasury money in the process.
The state pension age is due to increase from 66 to 67 between 2026 and 2028, and then to 68 between 2044 and 2046. There had been speculation last year that the government could bring that second hike forward into the 2030s, and while nothing came of it then it is a discussion that is sure to pop up once more.
One of the arguments in favour of raising the state pension age has been improvements in life expectancy. With people living longer, and in fact working for longer, the suggestion has been that there is no need for the state pension to be available so early.
This argument was dealt a blow though when the latest data from the Office for National Statistics, which found that life expectancy at birth in the UK was 78.6 years for men and 82.6 years for women in 2020-2022. That’s down from 79.3 years and 83 years respectively in 2017-2019.
Tom Selby, director of public policy at AJ Bell, pointed out that while bringing forward the scheduled increase in the state pension age would raise billions for the Treasury, it would also be deeply unpopular.
“While the ageing population continues to place huge strain on the public finances, these latest figures would make it extremely difficult for any government – either now or in the future – to justify a faster increase in the UK state pension age,” he added.
REMOVING THE TRIPLE LOCK
An alternative option would be to adapt ‒ or even remove altogether ‒ the triple lock.
The triple lock has been incredibly effective at improving the incomes of pensioners, and has led to significant year-on-year increases to the state pension. In 2023 the weekly payment jumped by 10.1%, while next year it is set to grow by 8.5%.
There have been calls for the triple lock to be abandoned, or at least revised so that such enormous increases can be tempered and pensioners receive more modest increases.
However, this would be a politically difficult thing to do ‒ particularly in an election year ‒ given the need to appeal to the one demographic which can be relied upon to vote.
IS THERE A FUTURE FOR THE STATE PENSION?
With the National Insurance fund at risk of running dry, there are concerns around the prospects for the state pension at all, and certainly in its current form.
Joshua Gerstler, chartered financial planner at The Orchard Practice, argued that the state pension is “simply not sustainable”, with the risk of it effectively going bust plain to see.
“I can see the State Pension becoming a means tested benefit in the future. It is more important than ever to be making your own provision for retirement as you cannot rely on the State Pension being around forever,” he added.
Chloe Phillips, chartered financial planner at Pura Vida Financial Planning, noted that part of the problem may be down to a misunderstanding around how the state pension works.
“Many people believe that there is a ‘pot of money’ specifically set aside for their state pension. They think, ‘I've paid into it all my life, so there should be something allocated just for me, right?’ However, unfortunately that's not quite how it works.”
The Institute of Fiscal Studies has also dug into the prospects for the state pension in future, and put together a four-point plan which would mean it enjoyed a sustainable future.
Those points are:
John Fitzsimons has been writing about finance since 2007, and is a former editor of Mortgage Solutions and loveMONEY. Since going freelance in 2016 he has written for publications including The Sunday Times, The Mirror, The Sun, The Daily Mail and Forbes, and is committed to helping readers make more informed decisions about their money.
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