Radical reforms to state pension age and guaranteed payouts proposed

The state pension age should rise by one year every decade and Brits should only expect to get payments for a limited number of years, for example two decades, a former pensions minister has told the government. The proposal would be the biggest shake-up in the state pension’s history if it went ahead.

In a radical departure from the current system of guaranteed payments for life from state pension age, the suggested reforms are the brain child of Steve Webb, who was pensions minister from 2010 to 2015 in the coalition government under David Cameron, and who is now a partner at pension consultancy LCP.

While there’s no guarantee the idea would be implemented, the case for the changes has been fed into the government’s ongoing review of the state pension age – which examines whether the state pension age needs to rise further and faster than planned to remain affordable – and Webb said: “We have already had interest in the ideas from within the government.”

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LCP’s analysis has found “the length of ‘retirements’ these days is a historical anomaly, especially for men”, said Webb. Brits who retire now can draw the state pension from age 66, and in some cases can spend up to a third of their life retired. “It is simply unsustainable to ‘lock in’ retirements of this length,” Webb added.

He blamed a “total failure” of governments in the 20th century to adjust pension ages to reflect “massive” improvements in life expectancy, meaning “retirements have got longer and longer” and are now at levels that cannot be supported by the taxes of the working age population.

“We therefore advocate a progressive increase in state pension ages, increasing by one year every 10 years for the foreseeable future, to get things back into balance, whilst giving people fair notice,” Webb said.

“Our view is that the system should target a set number of years – for example 20 years – as the expected length of time receiving a state pension, and this should not, at least for now, increase as life expectancy increases.”

However as part of his proposals Webb suggested a new ‘guaranteed period’ of five years – so, for the first time, even people for whom life expectancy is lower get something back.

“Those who have paid into the system all of their lives would be guaranteed that they or their heirs would get a minimum payout once they start drawing a pension. This would be a concrete way of addressing concerns over unfairness each time state pension ages are increased”, said Webb.

For women, the recent six year increase in the pension age, from age 60 to 66, has resulted in a fall in their length of retirement – a point currently still being fought over by women born in the 1950s known as the Waspi group – Webb acknowledged, though women’s retirements remain longer than men’s because women live longer on average.

How much does the state pension cost?

Successive governments have failed to tackle the issue of the outsized expense of the state pension, which is made more costly by an ageing population and increases every year under the triple lock.

In 2024/25 an estimated £166 billion of Department for Work and Pensions (DWP) benefit spending was directed at pensioners – around 58% of all benefit spending in Great Britain, according to government figures. Within that total, state pensions accounted for £138 billion (83%).

One key measure used by the government to assess the sustainability of the state pension is the proportion of adult life people are spending in retirement beyond state pension age.

The LCP paper showed this proportion has been going up, largely because throughout the whole of the 20th century there was no movement in state pension ages – while life expectancy for young adults in that time rose by 17 years, the state pension age did not rise at all.

The government’s original plan was to set state pension ages so people could expect to spend up to one third of their adult life in retirement. But LCP’s analysis argued this would be unsustainable.

Instead, LCP has made the case that the best way to put the state pension funding onto a firmer footing would be to set state pension ages so people could, on average, expect to receive a pension for a fixed period such as twenty years.

“This means that as life expectancies improve, retirements will stay the same length but working lives will gradually lengthen, thereby making the system more affordable,” said Webb.

One of the aspects the government’s review of the state pension age will explore is whether it should automatically increase in line with rising life expectancy.

The consultation, launched in August and closed in October, will now assess the "merits" of implementing automatic adjustments to strengthen government finances, as well as looking at how the state pension age can manage “the long-term sustainability of the state pension”.