As the UK state pension reaches its 75th anniversary next month, Phoenix Insights, Phoenix Group’s longevity think tank, has called for reform and future changes to the state pension age to prevent poverty spiralling for those unable to work up to a rising state pension retirement age.

Phoenix Insights warned that without reforms, delaying access to the state pension income alongside widespread under-saving “creates a perfect storm” for worsening poverty among people in the years leading up to their state pension age and into retirement.

The group’s latest report – An intergenerational contract - policy recommendations for the future of the state pension – draws on a year-long study working with the UK public to understand their views and expectations of the state pension system.

“With increases to the state pension age, people will need to work for longer or draw on other resources – such as a private pension savings, or working age benefits – in order to bridge the gap between stopping working and receiving income from the state pension,” the group stated.

However, polling shows currently half (51%) of people expect to drop out of work before reaching their state pension age. Physical health, mental health, and age discrimination are the main barriers preventing people remaining in work until their state pension age.

Meanwhile, Phoenix Insights’ modelling shows that over a third (36%) of people are already unlikely to be saving enough to meet their financial goals for retirement. Dipping into these saving early will further deplete retirement income prospects, the report added.

There is most concern for those unable to remain in work and without sufficient resources to draw upon, it showed. This group faces a benefits system that pays significantly less to those of working-age than those above state pension age.

The difference in these benefits, Phoenix Insights said, was highlighted as a significant driver of the increase in poverty among those aged 65 following the increase in the state pension age from 65 to 66, and more people could fall into poverty as the state pension age increases further.

Phoenix Insights is recommending:

  • early access to state pension for those with a terminal illness;
  • means-tested bridging benefit – a top up to universal credit, equivalent to pension credit, accessible one year before their state pension age, for those on low incomes with a work limiting health condition, or caring responsibilities;
  • a co-ordinated Sustainable Work Fund used to engage and support employers and workers.

These changes, and other proposals in the report, could be funded by reinvesting the equivalent of 20% of the amount that the Treasury would save whenever the state pension age increases.

Patrick Thomson, head of research and policy at Phoenix Insights, said: “The state pension is the biggest single part of the social security system and has been the foundation for many people’s retirement income over the last 75 years. However, looking ahead, it is facing serious questions of intergenerational fairness and affordability as large numbers reach retirement in the coming decades.”

He noted that increasing the state pension age would mitigate some of the costs, but delaying access to state pension payments alongside the under-saving crisis would create “a perfect storm for worsening poverty for those unable to remain in work until their late 60s”.

“Policy interventions are needed in the years approaching state pension age so that more people aren’t dragged into financial hardship,” Thomson said, adding that radical change is needed in the way that people think about work, making it more sustainable and fulfilling, with better opportunities to upskill, change careers and save for a good retirement.

Alyshia Harrington-Clark, head of defined contribution, master trusts and lifetime savings at the Pensions and Lifetime Savings Association, said: “There is much to support in Phoenix’s contribution to the debate on how to ensure people have enough income when they retire. The PLSA’s analysis shows that at today’s savings rates, 20% of households won’t reach the minimum standard of living established by our Retirement Living Standards, with those on very low incomes especially vulnerable.”

She added that any future review of the state pension – which is low when compared to the UK’s international peers – should ensure that its value rises sufficiently to keep pensioners out of poverty.

“Setting a timeline to lift minimum automatic enrolment contributions should also be prioritised; it is the single most effective reform to get more people on the right track,” she said.

“We want to see employer contributions increase to 5% by 2030, so they match those of employees and achieve an overall pension contribution of 10%. And then, in the early 2030s, we think both employer and employee contributions should gradually increase by a further 1%, to a total of 12%,” Harrington-Clark said.

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