Navigating uncertainty: how potential state pension reforms may affect you

With the budget approaching public finances start to come under a microscope, with speculation constantly in the news around where the Chancellor might look to raise taxes or cut public expenditure.

Therefore, when a government review is commissioned on the State Pension it ramps up further speculation that a change in that area is imminent. The impossibility of second-guessing legislation means that making decisions on speculation often lead to bad outcomes, however being mindful of how things might change can help inform our decisions today that provide cover for future eventualities.

So, in this blog we will look at the four main areas this report might consider when looking at the State Pension and how this could impact you.

State pension age and longevity

The State Pension was introduced in 1908, where it was means tested and payable from age 70 onwards. This was also at a time when average life expectancy was 50 for men and 54 for women, so much less than half of the population did not live to reach state pension age. Those that did receive it on average only received it for around 9 years.

In 2025, those eligible (born before 1960) 88% of men and 94% of women are likely to have reached State Pension Age and it is now on average paid between 18-21 years.

One of the key outcomes of this review will be to tackle this increased longevity and the fiscal sustainability of the State Pension for future generations. This could see the planned increase to the State Pension Age to 68 in 2044 brought significantly forward and perhaps the qualifying age increased back to 70 or beyond.

Income adequacy

Current projections show that tomorrow’s retirees could be 8% worse off than todays and this gap is only widening. Currently the State Pension receives guaranteed inflationary increases through the triple lock, but this has seen the cost of the State Pension rise from 10% of the total UK tax receipts in 2010 to 13% in 2025.

These two competing pressures of declining wealth for future retirees and the increasing burden on the public purse will have to be reconciled in this review, with any removal or reduction to state pension increases likely twinned with mandated private initiatives – such as the previously introduced autoenrollment initiative.

Distributional effects

Previous changes to the State Pension have disproportionally impacted those in poorer health and manual occupations, who find it harder to extend their working lives. Both the Health Foundation and the Trade Union Congress have called for introductions such as flexible retirement access to the State Pension for those forced out by poor health.

Whilst this is quite a common provision in private pension arrangements it has never gained much traction when it comes to the debate around the State Pension. However, if the outcome of this report is a removal of the guaranteed inflationary increases or rise to the State Pension Age then this will have to be addressed.

Increased private responsibility

Successive governments have stressed the importance of increasing and highlighting the need for people to save privately for retirement. However, all the recent analysis suggests much more needs to be done to support both employees and employers to save for retirement.

This report will undoubtedly touch on this and various suggestions such as changing tax-relief on pensions to a flat 25% (a +5% increase for Basic Rate taxpayers but a -15% deduction for higher rate taxpayers) has gained popularity in some circles.

What does this mean for you?

Our view on saving for retirement or spending in retirement remains the same:

• Deal with legislative change as and when it happens – not second guessing beforehand.
• Regularly review your circumstances and how the State Pension fits into your overall retirement provision.
• Make sure that your pension contract(s) are fit for purpose and allow you the full suite of retirement options.
• If working, make sure that where possible you are maximising your employer pension contributions.
• Revisit the suitability of your investment strategies, do they hold up under stress tests and bad economic conditions.
• Continue to diversify your wealth amongst different tax-wrappers, to provide flexibility in retirement under ever shifting legislative and tax landscapes.

Chancellors and policy makers are always going to face trade-offs between fiscal sustainability and individual fairness, but the long-term pattern of increased private responsibility looks set to stay. The best remedy for any outcome from this governmental review is a robust financial plan that has the flexibility to absorb ever changing legislation.

Therefore, as the headlines and noise around the budget approach please do just reach out to us around any concerns you have.

To speak to us, simply get in touch via enquiries@carbonfinancial.co.uk or call 0131 220 0000.

The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.

This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action.

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