‘There will come a time when we can’t kick the can further down the road’: Sarah Coles on state pension issues

It comes courtesy of the triple lock, which means that each April, the state pension will rise with inflation, wages, or 2.5% - whichever is highest. This year, it was wages.

The triple lock has fundamentally been a force for good. Some of us are old enough to remember what life was like for pensioners before it was introduced, especially after the earnings link was broken in 1980, and pensioners watched wages race away. I remember how much my parents had to support my Granny – a Wren during the war – whose pension wouldn’t stretch to both heating and eating.

Under the current system, at times of high wage or price inflation, the state pension keeps up, and at times of lower inflation, it becomes more generous. It has risen ahead of both wage and price inflation three times since it was introduced. As a result, while in 2008 the state pension offered just 16% of earnings, now it’s closer to 25%. Pensioners now have lower poverty rates than average – and much lower rates than working people with children.

However, the state pension is still far from a king’s ransom. It’s not particularly generous when compared to those available elsewhere in the world. The OECD compared state pensions in 2018, and while it’s difficult to make comparisons when the systems are so different, it found that in the UK around half of pension income comes from the state pension – compared to 16 of the 36 countries where it’s over 90%.

Ask most pensioners and they’ll tell you that this year’s rise is desperately needed. For millions of people, it’s the only thing keeping the wolf from the door. The Institute of Fiscal Studies has found that it accounts for 71% of the income of the fifth of retired households on the lowest incomes.

At times of high inflation, the state pension lags horribly, so things can be pretty bleak before the rise kicks in. In April 2022, the state pension went up just 3.1%. Then between April 2022 and April 2023, we had a year of sky-high inflation, before the state pension caught up - leaving millions of pensioners struggling to make ends meet in the interim.

And that’s before you add tax to the mix. Once the full new state pension rises to £11,502 a year and the full basic state pension increases to £8,814 a year, they’re both alarmingly close to the frozen personal allowance of £12,570.

If your private pensions take you over the threshold, you’ll face tax on your income. Around 8.5 million people over the age of 65 are now paying income tax, and around 1.2 million more will be pushed into paying it in the coming tax year. To make matters worse, while pensioners suffer from the frozen income tax thresholds, they don’t pay National Insurance, so they haven’t benefitted from the cuts that have eased some of the pressure on working people.

However, on the other side of the debate, there are plenty of people who are worried that in its current form, the state pension is unsustainable. Logically, if in periods of low inflation, the pension always gets more valuable, there must come a time when the state pension is too generous to be fair.

Then there’s the question of cost. The state pension cost £110.5 billion in 2022/23, which is just under half of the total benefits bill. The Office for Budget Responsibility has calculated that the price tag then soared to £124 billion in the 2023/24 tax year.

And while the bill rises, there are fewer people to pay it. There were 605,479 live births in England and Wales in 2022 - the lowest number in 20 years – while the fertility rate hit a record low. It means that over time, bigger pensions will need to be paid by a smaller working population.

It means that in order to keep costs down, the state pension age could rise again. Recent research from the International Longevity Centre suggests the state pension age may need to rise to 71 as early as 2050 to cover the costs. As a result, more people will be unable to work to state pension age, and more people will never reach it.

Healthy life expectancy in 2020/22 was just 62.4 years for a man in England and slightly higher at 62.7 for women. With state pension age currently pegged at 66 and set to go higher in the coming years, there is a widening gap between how long we can reasonably expect to work and when we will collect our state pension.

It raises the question of whether it’s more important to ensure that the pension keeps getting more generous, or that, as people get older, they can afford to stop working when they need to.

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The answer may not be to continue as we are, but to establish exactly what constitutes a fair payment – increase it as much as is needed today, and then establish a link to inflation and wages in order to keep it at the same level in real terms for the future.

Of course, this isn’t easy when the debate is so polarised. It’s one reason why successive governments keep putting it in the ‘too difficult’ pile, and pledge to keep the triple lock. However, there will come a time when we can’t kick the can further down the road because we’ve run out of road, and someone somewhere will need to wrestle with this thorny issue.

When they do, they can expect to be attacked on all sides. But sometimes you have to choose the hill to die on. For me, I’ll stick to the really key issues – and my strongly maintained stance that salt and vinegar Chipsticks are the best.

British Savings Bond

NS&I British Savings Bonds went on sale last week, offering 4.07% and 4.15% over three years. The rates are incredibly disappointing, especially after the fanfare in the Budget.

Easy access savings are dominating the market, where savers can make more than 5% at the moment. It means NS&I was always going to have to offer something special to get savers excited about three-year savings deals. Given that there are still three-year accounts on the market paying 4.65% or more, these new NS&I rates just aren’t special enough to persuade swathes of new savers to tie their money up for longer.

The government may be hoping that the British branding will attract some savers, but it’s difficult to see exactly what makes this more specifically British than any of the other NS&I products raising money for the government. It means there’s every chance this Bond is a George Lazenby rather than a Sean Connery. You can give him a Union Jack parachute, but he’s still unlikely to fly.