State pension age could rise to 68 by 2040, says work and pension secretary

Decision on increasing the state pension age past 67 is delayed and will not be made by the current government

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(Image credit: © Getty Images)

The Work and Pensions Secretary says the state pension age is not likely to be raised to 68 until the 2040s - but it is not a decision to be made by the current UK Government.

Mel Stride said there was “no reason why you need to take the decision now” on any change, having pledged to inform voters 10 years ahead of time.

The state pension age is due to rise from 66 to 67 between 2026 and 2028. The change will be phased in, which means there will be periods when the state pension age is 66 years and between one and 11 months. This move has been legislated for since 2014.

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But now Stride has chosen to delay any consideration about increasing the state pension minimum age to 68.

Speaking at a political correspondents lunch in Westminster last week, he said that, while the decision had been deferred until after the next general election — which is expected to happen in 2024 - he anticipated the increase could happen in “2040 or thereabouts”.

An independent review by former Confederation of British Industry (CBI) director-general John Cridland in 2017 recommended the state pension age be raised to 68 in 2037-39, while a follow-up study by Baroness Neville-Rolfe this year said the timetable should be pushed back to 2041-43.

Mr Stride, asked when was the earliest he could envisage it being changed from 67 to 68, said: “I think it is fair to say that the earliest would be Cridland’s suggestion of 2037, but that was predicated on different life expectancy data.

“And in fact if you applied what we know now to Cridland’s methodology, you would end up with a date in the 2050s actually.

“Neville-Rolfe came in with something in the 2040s, so I suspect it is in that range of 2040 or thereabouts.

“But it will be for somebody else to sift through the data in the next Parliament.”

Explaining his reasoning for delaying any decision to move it to 68, Mr Stride said he was influenced by statistics showing UK life expectancy growth may be slowing, among other factors.

He said: “Ultimately, I took the decision that, because of Covid, because of the uncertainties economically — because there are many metrics that play into this decision — and the fact the important thing is you give people, I feel, 10 years notice of any change.

“You are debating whether you are going to do it in the 2030s, 2040s or thereabouts. So there is no reason why you need to take the decision now. You can wait until the first couple of years of the next Parliament to take that decision and still give people 10 years’ notice of your decision and make the change at that point.”

Stride’s statement shortly follows a new study by the Institute for Fiscal Studies (IFS) that revealed the state pension age will likely hit 70 by 2050 and the need to overhaul the pensions system.

According to the IFS’ review, the state pension age will need to rise substantially in the decades ahead as there are not enough workers to match the growing state pension bill as life expectancy improves.

Projections from the Office for Budget Responsibility (OBR) suggest spending on payments to pensioners will rise from 5.6% to 9.6% of national income over the next 50 years - an increase worth £100bn a year in today’s terms.

What is the future of the state pension?

The state pension rose by a record 10.1% in early April, but the government faces some stark choices when it comes to its future. Much along the same lines as the IFS report, an independent review by the Department for Work and Pensions (DWP) also identified a number of potential pitfalls to the future of the state pension.

The Independent Review of the State Pension Age, which looked into the metrics the government should use when setting the state pension age, found pension payments will rise to “unsustainable” levels unless the government raises the state pension age to 74 for those currently aged 30 or axes the triple lock.

A cap on state pension spending or speeding up increases in the state pension age are two remedies the report purposes to avoid disaster.

We may also see the government consider an early access scheme where some workers, especially those that do manual jobs, receive their state pension sooner than other types of workers.

State pension spending cap

The Independent Review of the State Pension Age report says the amount the government will be spending on the state pension is simply too costly “given the very real economic challenges faced by Government and the stark increases in state pension-related expenditure”.

Therefore the report says it is “not appropriate” to increase costs by delaying the increase in the state pension age to 67.

Instead, it recommends the state pension age should rise to 68 between 2041 to 2043, up to three years earlier than currently planned, and to 69 between 2046 and 2048.

The report also proposed the government cap state pension spending at up to 6% of GDP.

But this would leave the government with an “unenviable choice as the population ages”, says Alice Guy, head of pensions and savings at interactive investor.

With a spending cap, the government would have to choose whether to raise the state pension age to as high as 74 for current 30-year-olds or cut the triple lock.

The triple lock ensures the state pension goes up in line with whichever is higher, 2.5%, wage growth or inflation.

But if the pension bill rises to “unsustainable” levels, the government could be forced to scrap the measure.

Increasing the state pension age to 74 for someone currently aged 30 would mean “ they miss out on eight years of state pension compared to current pensioners, worth £209,432 by 2067”, says Guy.

State pension age increase delays seem unlikely going forward

The government recently decided to postpone plans to increase the state pension age to 68 in the 2030s due to decreased life expectancy in the UK.

This was also likely to claw back some favour ahead of the next general election in 2025.

Currently, the state pension age is 66, due to go up to 67 by 2028 and 68 by 2046.

While the delay was welcomed by many, the cost of state pensions and the “current position of UK finances” means we “need a proper debate on the future of the state pension”, said Andrew Tully, technical director at insurer Canada Life.

The state pension is “hugely expensive, and in our pay-as-you-go system where the tax from the workforce pays the pensions of retirees’ there has to be a sensible debate around intergenerational fairness and the affordability of the state pension in its current format”, says Tully.

According to the Office for Budget Responsibility, the cost of the state pension and other pensioner benefits is set to rise by 37%, from £116.8bn in 2021/22 to £160.4bn in 2027/28.

Additionally, the number of people of pensionable age is predicted to rise by 28% to 15.2 million by 2045, while the working-age population is expected to rise by around 4.5% in the same period.

“If we see this shift in the ratio of workers to retirees this will clearly have significant implications around any debate on the future funding of the state pension,” said Tully.

How will this affect private pensions?

The government is planning to link the minimum private pension to the state pension age, setting it at ten years before the state pension age.

If the report’s proposals go ahead, this would mean someone currently aged 30 would have to wait until they are 64 before being able to access their private pension pot.

This highlights the need for people to take saving for retirement into their own hands.

Workers who want to retire earlier would need to start saving into an ISA, which has no age limit, to supplement their retirement.

Nicole García Mérida

Nic studied for a BA in journalism at Cardiff University, and has an MA in magazine journalism from City University. She joined MoneyWeek in 2019.