Call to make the state pension system fairer

23 April 2022

As the Department for Work & Pensions gets set to close its independent call for evidence on the future of the UK state pension age, AJ Bell has called upon the government to err on the side of simplicity.

Under current legislation, the state pension age will increase to 67 by 2028 and 68 by 2046. While the previous government proposed accelerating the increase to age 68 by seven years, this has yet to be written into legislation.

Tom Selby, head of retirement policy at AJ Bell, said: “If what we have seen in the French presidential debates is anything to go by, proposed increases to the UK state pension age could be a political lightning rod at the next general election. Given that recent data points to a slowdown in life expectancy improvements, with some regions of the UK seeing average life expectancy go backwards, any move to increase the state pension age will inevitably be hugely controversial.

“On the other side of the coin, a Chancellor nursing a £400 billion black hole in the public finances will likely have serious reservations about pushing back planned state pension age rises or halting them altogether.”

Selby said the Government could examine the case for allowing people to access their state pension early at an actuarially fair reduced rate. This could help those with limited life expectancy receive a larger amount of state pension income. It could also be relatively simple to implement, mirroring existing flexibilities which allow people to defer receiving their state pension.

A survey by AJ Bell found that one in six people would be interested in early state pension access at a lower rate if it was available.

However, Selby warned the Government may be forced to contend with large numbers of people rushing to access their state pension early, while pensioners may face more severe income challenges in later life.

A number of other options to help make the state pension system fairer have also been floated, including setting state pension age based on someone’s postcode to reflect different life expectancies. However, Selby warned this could cause huge complexity and be costly to implement.

Selby said: “Any policy decision on the state pension needs to balance fairness against complexity. The more you try to make the state pension system fair, the more difficult it becomes for ordinary people to understand and navigate.

“We would strongly urge the Government to err on the side of simplicity. Automatic enrolment is enabling millions of people to get into the saving habit for the first time. As engagement with these pensions builds, it is vital people know what they are likely to get from the state and when.”

Selby added: “Simplicity, certainty and good communication are all absolutely essential in building and maintaining trust in pensions.”

Professional Paraplanner