How fast will the State Pension age rise?

There are few topics in finance as emotive as State Pensions and the State Pension age. 

It understandably inflames those closest to the point of retirement but also sends ripples of anxiety through all age groups. Most of us who save, after all, do so because we want to retire well, and we want to retire early - or at least have the option to.  

Every announcement of a change - or even a call for it - prompts a raft of queries from younger people to ask for help in the beginning to save and save better. They want to take control rather than wait for the state to tell them when they can retire. 

This week, a report from the International Longevity Centre suggested the State Pension age may need to rise to 70 or 71 by 2050, up from the current plans to raise it to 68 by then. 

It therefore seems timely to sum up everything you need to know about pension ages, for State AND personal pensions, and look at what you need to do to take control of your own retirement age. Our retirement calculators are priceless for your own planning. 

What decisions have been made on State Pension ages?

The government has legislated for an increase from 66 to 67 in 2026-28 and to 68 in 2044-46. However, the timing of the rise to 68 is in doubt and will be looked at by an independent review after the next election.  

These reviews are held each parliament and come back with recommendations which the government accepts, rejects, or comments on. The 2017 review suggested the rise to 68 should be in 2037-39. The 2022 review recommended a slower increase to 68, in 2041-43, and it mooted a possible rise to 69 in 2046-48. The government acknowledged the recommendations but delayed the decision, promising to hold another review within two years of the next parliament, sooner than expected. 

The important bit is seeing who is affected: 

• The rise to 67 affects those born on or after 5 April 1960. 
• The rise to 68 (between 2044 and 2046) affects those born on or after 5 April 1977. 

It’s worth noting that the 2017 review’s suggestion that the rise to 68 should be 2037-39 would affect all those born between 6 April 1970 and 5 April 1978 to different degrees. 

What were the warnings this week? 

New data from the International Longevity Centre suggested the state pension age would have to rise to 70 or 71 by 2050 to remain affordable. 

The ILC warned of ‘widening demographic imbalances’ that will heap pressure on government finances. It also highlighted that younger people lack the savings and assets that their parents and grandparents had. In 2010, those under 40 held just £7.53 of every £100 of wealth. Over the past decade, this has fallen significantly to only £3.98, its analysis showed.

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What is the process for deciding State Pension ages? 

A previous idea to automatically link the pension ages to life expectancy was dropped a decade ago. Instead, it was decided that independent reviews would be held each parliament and make recommendations, with the government offering a response the following year.  

The whole process is underpinned by some broadly agreed aims: 

• That a third of adult life should be spent in retirement.  
• That State Pension costs should not exceed 6% of GDP.  
• People should be told 10 years in advance of any changes.  

Reviews were subsequently held in 2017 and 2022.  

Is the State Pension affordable? 

When the pension was introduced in 1909, it applied to people from age 70. But average life expectancy from birth was just 52. 

Between 1951 and 2020, life expectancy increased by 10 years. It is projected to rise by another four years by 2070. 

While longer lifespans are something to celebrate, they come with additional state costs.  

The ‘triple lock’ must also be considered. It guarantees a minimum rise of 2.5% rise each year or the higher of inflation or wages. As a result, State Pension payments have grown at a decent clip over the past decade, even though it was downgraded to a ‘double lock’ during the recent inflation spike. 

The third consideration in cost is the demographic bulge in the number of people reaching retirement age - the so-called baby boomers - coupled with historically low fertility rates. The government expects five million more pensioners by 2070, with just one million more people of working age. 

The government has a difficult balance to strike. The Office for Budget Responsibility expects the cost of the state pension as a percentage of GDP to rise from 4.8% to 8.1% by 2071. It would breach the 6% cap somewhere in the late 2040s (see table). 

The primary ways to mitigate this are to either slow rises in the State Pension, which would involve watering down or abandoning the triple lock, or to increase the age of State Pension eligibility.  

Future governments may pull other levers to manage pension costs. There has been mention of increasing the number of years of National Insurance Contributions needed to qualify for the full State Pension. It could, for instance, be increased from 35 to 40 years.

^{Source: Office for Budget Responsibility, 2023} 

Will the State Pension age keep moving away from me? 

Up until the last few years, the direction of travel had been one way with growing financial pressure increasing calls for quicker rises. But the thinking has been affected by changes in life expectancy trends. Namely, lifespans are extending slower than previously forecast.  

In the 2017 State Pension age review, life expectancy at age 65 was projected to reach 27.3 years by 2060, but the latest 2020-based projections were for 24.4 years. Increased mortality from Covid has played a part. In addition, fears are growing that general health is worsening for retirees, strengthening the need for state support at a reasonable age.  

The ‘third of life’ aim was taken to be 31% ratio in the 2017 review but 32% in the 2022 review. Both are obviously less than a third. Using different ratios has a huge impact. Sums undertaken last year by government actuaries projected that 32% of life would point to a rise to age 68 in 2053-55 and 2041-43 based on 31%, for instance.

^{Source: State Pension age Review - government response (2023)} 

Time is against decision-making. If the next government wants to opt for the earlier 2037 change to age 68, it must decide in the next few years if it is to makegood on the 10-year advance warning promise. A pledge has also been made to write to everyone on their fiftieth birthdays to flag their State Pension date. 

How to respond to rising pension ages

If retirement is a way off, you still have time to take control of your own pension age. Time is a powerful weapon and the single biggest factor that determines the growth of your money - the longer, the better, although of course there are no guarantees.  

The hypothetical example below shows that if David starts investing £100 a month when he is 25 and Mike invests £200 a month from the age of 45, they both save the same £48,000 by age 65 and reinvest the returns. Assuming a 5% annual return, the effect of growth, reinvestment and compounding have longer to work on David’s investments, and so he ends up with almost twice as much as Mike. 

• Isa calculator: how might your money grow 

Where do you save?

The best home for this money is nearly always a company pension. Many employers will match or part-match contributions. This is free money - take advantage. Pensions are the best vehicle because of the tax breaks. You don’t have to pay tax on your contributions made from your pay. 

The trick is to keep track of all your pension savings. It may make sense to combine pots from previous company pensions into one place, such as a self-invested personal pension (SIPP). This will give you better visibility of where you’re at. Private pensions have the same advantage of escaping income tax on contributions with a generous annual limit of £60,000 for most people.  

Bear in mind that there is also a ‘private pension age’ - the age at which you are allowed to access money in a company pension or SIPP. This is expected to remain fixed at 10 years below the State Pension age, as has largely been the case since a raft of rule changes in 2007. The government has said this private pension age will rise from 55 to 57 on 6 April 2028, affecting anyone born on or after 6 April 1973. 

There’s more to think about, such as how you retire. A book published in 2016, ‘The 100-Year Life: Living and Working in an Age of Longevity’, prompted much debate on how retirement, and working lives, may need to change. Enforced retirement at pension age, after all, was outlawed in 2011. Today many companies, amid a skills shortage, are undertaking initiatives to recruit older people; there are growing opportunities. 

The 100-Year Life suggests the traditional three-phase life of education, employment and retirement will be replaced by a series of shorter stages that enable people to work longer, perhaps into their 80s. This could be a mix of traditional working patterns, entrepreneurship, further education, concurrent part-time roles and so on. This would give more time to save more money to pay for full retirement when it arrives. For many, this is not practical, but it paints a future vision of how this could happen.  

How much will I need?

New estimates of retirement were published this week by the Pensions and Lifetime Savings Association (PLSA).  

Individuals seeking a comfortable retirement would need £43,100, up by 15.5%. The eye-catching rise was a 34% increase to £31,300 for a moderate lifestyle.  

These numbers are based on focus groups expressing what they would like in retirement. One of the reasons for the difference in the rises was that costs rose sharply across nearly everything, but particularly on motoring costs. The ‘comfortable’ group were happy to move from having one three-year-old Ford Fiesta, replaced every five years, when previously they expected to have both a mid-range SUV and a second smaller car such as a Polo or Fiesta. The ‘comfortable’ band would have had a far bigger rise if not for this change.  

The numbers are useful guidance but, as you can see, they are subjective. We would recommend working out your needs with our Retirement costs calculator. It is based on PLSA data but you can adjust it for your planned lifestyle.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.