Four out of five adults saving into a pension pot are not on track to have a basic living standard when they retire — and the expected £400-a-year rise in the state pension won’t make up the difference, experts say.
The state pension is protected by a triple lock that guarantees it will rise every April by the rate of inflation, average wages or 2.5 per cent — whichever is highest. The calculations are based on the Consumer Prices Index measure of inflation for the year to September or wage growth in the three months to July.
A full new state pension is worth £11,502 a year and in March the Office for Budget Responsibility (OBR) said it expected the state pension to increase by 3.7 per cent this year. This week the BBC reported that it had seen internal documents confirming that the Treasury expects the state pension to rise to more than £11,900 in April, in line with average earnings figures due out next week.
But the Living Wage Foundation, a campaign group, said a pensioner needed an income of £19,300 a year before tax to cover their basic needs. The group said a typical pensioner would need a pot worth at least £107,800 to provide the income which, added to the state pension, would give them £19,300. This is up 60 per cent from the £68,300 pot they needed three years ago. “Several years of surging prices massively increased the cost of meeting even basic needs in retirement. Increases to the state pension are welcome, but still fall short of what most need to live a decent life,” said Katherine Chapman from the Living Wage Foundation.
The £400 increase to the pension will be offset by the loss of the winter fuel allowance for about seven million households. This is worth between £200 and £300.
Some 53 per cent of workers who are saving into a pension say they do not feel they will ever save enough to retire, according to a survey of 3,000 carried out by the foundation. And millions could find they have to work longer if the government considers raising the state pension age to 68 earlier than 2046.
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The Centre for Economic Performance (CEP), a research institute based at the London School of Economics, this week urged the chancellor, Rachel Reeves, to put the state pension age up as soon as possible to save billions of pounds. It is set to go from 66 to 67 between 2026 and 2028 and to 68 between 2044 and 2046. The government has previously committed to giving ten years’ notice of any changes to state pension age, meaning that any acceleration is not likely before 2034.
Increasing the state pension age to 68 a decade early would affect those aged 47 to 57. The consultancy Lane Clark & Peacock (LCP) estimates that about 7.7 million people would lose out. Steve Webb from LCP said: “Increasing state pension age would yield substantial amounts for the government, but if ten years’ notice has to be given there will be no extra money for this parliament or the next. The chancellor may hesitate before making changes that would be politically difficult, but not benefit them financially in the short term.”
The OBR expects the state pension to cost the government £138 billion this year, rising to £153 billion in 2027-28. The CEP said raising the state pension age to 68 earlier would save about £6.1 billion a year. It said the savings would outweigh the impact on 67-year-olds who had to wait an extra year.
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The economist Lord Richard Layard, who contributed to a CEP report into the state pension age, said: “The logical result of people becoming healthier and living longer is they should have to work longer for their state pension. It’s not sustainable to expect a younger population to sustain an ever-growing population of people older than them.”
The researchers estimated the impact of increasing the state pension age by one year on the life satisfaction of those affected on a scale from one to ten. It said a one-point drop in well-being was equivalent to a financial loss of £15,268. It found that increasing state pension age by a year would equate to a cost of about £1,830 per person, but that the Treasury would save £7,625 per person.
The Treasury said: “We are committed to the triple lock which will boost over 12 million pensioners’ incomes by hundreds of pounds.”