State pension age could have to be hiked to 71

• State pension age is 66, and a rise to 67 is due between 2026 and 2028
• Government has delayed a decision on a hike to 68 until after the next election 
• In 2028, the minimum age to access private pensions will go up from 55 to 57

The state pension age could have to rise radically from 66 to 71 to maintain the status quo of number of workers who financially support pensioners, an influential think tank warns.

This might have to happen as soon as 2040 unless other measures are taken, it suggests. 

A ‘dependency ratio’ of just over 50 per cent – just one worker per retiree – is projected for many countries with well-developed economies including the UK by 2050.

It was around 20 per cent, or five workers per retiree, in 2000 but populations are aging rapidly, according to the International Longevity Centre.

Today, it estimates there are roughly three working age adults for every person aged 65-plus.

The think tank warns the state pension age might need to hit age 70-plus as early as 2040 to keep the dependency ratio sustainable, if you factor in the time 15 to 20-year-olds spend in full-time education and therefore not in the workforce.

Men and women’s state pension age is now 66 and between 2026 and 2028 it will rise to 67. In 2028, the minimum pension age for accessing workplace and other private retirement savings will also go up, from 55 to 57.

The Government announced early last year it would delay a decision on the next state pension hike to 68 until after the next election, citing lower average life expectancy forecasts as the main reason.

‘Given the level of uncertainty about the data on life expectancy, labour markets and the public finances, and the significance of these decisions on the lives of millions of people, I am mindful a different decision might be appropriate once these factors are clearer,’ said Work and Pensions Secretary Mel Stride at the time. 

The Government is meant to give people at least 10 years’ notice of any future change in the state pension age. 

The ILC says today: ‘The recent stalling in life expectancy during the austerity years and Covid has temporarily eased the pressure for increases in state pension age beyond 67 after 2027 but longer-term the pressure will be on to increase it to 68 or 69 before that.

‘But while we are facing ill health earlier in our long lives, the problem becomes even more pressing because of the exit of workers from the workforce long before they reach state pension age as it reduces the tax base to pay for pensions.’

What is the dependency ratio? 

The dependency ratio is the percentage of people aged 65-plus relative to the working adult population aged 15 to 64, explains the ILC.

‘This internationally recognised measure does not include children under 15 or account for economic inactivity amongst ‘working-age’ adults or those who work beyond the age of 65,’ it says.

You can define the UK’s working adult populations as 20 to 64 years instead, to account for time spent in full-time education by those in their mid to late teens.

The ILC report is by its associate head of global research, Professor Les Mayhew, and senior health research lead, Arunima Himawan.

The ILC says poor health is one of the key reasons for this exodus and is one of the greatest barriers to economic prosperity because it lowers output and increases taxes.

‘Additionally. a smaller working population and a large economically inactive population create huge labour shortages which must be filled by migrant labour which creates additional problems.’

The ILC says enabling people to work for longer is challenging, because by age 70 only an estimated 50 per cent of adults are disability-free and able to work.

It has previously published research which suggests a greater focus is needed on preventing ill-health not just in old age but from early age through adulthood.

‘The longest health spans are in countries which spend most on prevention and adult immunisation,’ it says.

And the ILC adds: ‘If the proportion of the economically active population were to increase from current levels of around 78 per cent to 85 per cent then it may be possible to hold the state pension age at below 70 from 2040 – at least for a few years.’

A Government spokesperson responded to the ILC by saying it will continue to ensure the state pension remains a sustainable and fair foundation of income in retirement for future generations.

‘The over 50s are an asset to our economy which is why we committed £70million in employment and skills support for them at last year’s Spring Budget. This investment is already paying off with an extra 54,000 over 50s added to company payrolls in the last year.’

‘Our £2.5billion Back to Work plan is supporting people to stay fit and find work in addition to £14.1billion to improve health services help people live longer, healthier lives.’

What do pension experts say?

‘Just last year, the government attempted to claw back public favour amongst its core voters by delaying its widely anticipated state pension age increase,’ says Jon Greer, head of retirement policy at Quilter.

‘At the time, the plan to delay was reportedly due to average lower life expectancy, but the ILC’s data suggests this may no longer be the case as it says that while the stall in life expectancy has temporarily eased the pressure for increases beyond 67 after 2027, in the longer term the pressure will mount.’

Greer notes that Office for National Statistics figures released last week show the number of people aged 85 and over could grow in the next 15 years from 1.6million to 2.6million, and says this will heap pressure on state pension costs and put a dire strain on social care which will need increased funding.

‘The Institute for Fiscal Studies previously suggested that a one-year increase in the state pension age in the late 2030s would likely save around £8-9billion a year. However, delaying the planned rise in the state pension age to 68 by seven years would cost at least £50billion.’

Greer offers the following tips for people concerned about state pension age rises.

– The framework for reviewing the age says there should be a minimum of 10 years’ notice for individuals affected by changes.

– Increasing contributions to a work or private pension can help you bridge the gap if you do end up having to wait longer to access your state pension.

– You may want to save into different savings vehicles such as Isas so that you can draw on them before you reach state pension age.

Becky O’Connor, director of public Affairs at PensionBee, says the prospect of a dramatic increase in the state pension age to 71 is alarming.

‘People depend on the state pension for a significant chunk of their retirement income. It’s also key to confidence in people’s ability to retire at all.

‘Even the suggestion that people won’t get it until their 70s will make people feel more distrustful than they already do in the state pension system and may cause actual worry and anxiety about their future.

‘If people suffer ill health or face the need to care before 71, as is likely for many, they may have to give up work sooner than they can receive their state pension anyway and have to claim working age benefits for longer instead.

‘While the sustainability of the state pension needs to be properly examined, increasing the age people get it may not turn out to be the cost saving a government would hope for.’

O’Connor says her firm’s research has shown 48 per cent of UK savers believe they won’t be able to retire before the state pension age if and when it is raised to 68

Meanwhile, 60 is the perceived ideal retirement age, but to achieve this means people would have to save even more through private pensions

‘The ‘pre-state pension gap’ is the total amount of income an individual requires to cover their expenses ahead of their state pension entitlement from other savings, and this would get bigger.

‘There’s also a risk that people could use up too much of their private pension savings early in retirement if they had to stop work before state pension age, possibly leading to greater poverty in later old age.’

Kate Smith, head of pensions at Aegon, says: ‘Pushing back the state pension age to age 71 would be a shock for many – when they are expecting to receive this from age 67 or 68. Some will only receive it for a short time, others not at all.

Of the ILC study, she says: ‘This report, published in an election year, highlights the need for the political parties to detail their plans for state pensions ahead of the UK general election.

‘This is too important an issue to be kicked into the long grass. People need to know where they stand and what this means for their later life, giving them plenty of time to adjust their working and savings plans.

‘Raising the state pension age feels a like very blunt instrument – and would likely penalise those most in need.’