- Yesterday’s Spring Statement outlined the challenges the government faces in meeting its fiscal rules
- Limited flexibility within current plans may prompt the government to explore additional adjustments, which may include the state pension
- In April, the state pension is set to rise by 4.1% to £11,973 a year – perilously close to the frozen £12,570 personal allowance
- The Office for Budget Responsibility (OBR) projects that pensioner spending will rise to £182 billion by the fiscal year 2029-30 in its latest economic and fiscal outlook
- The rise in state pension age from 66 to 67 between 2026 and 2028 is expected to reduce borrowing by £10.5 billion by 2029-30, with a further state pension age rise, from 67 to 68, currently scheduled for the early 2040s
- Torsten Bell, the pensions minister, suggested in March that these plans may change due to slower increases in life expectancy in the UK
Rachel Vahey, head of public policy at AJ Bell, comments:
“The chancellor’s Spring Statement brought home the precarious tightrope the government is walking to meet its fiscal rules. With little to no wriggle room built into current plans, the government may still be forced to look elsewhere for further savings. And one area that could come under scrutiny is the state pension.
“The biggest proportion of the welfare spending is on pensioners. This is set to rise by 20% to £182 billion by 2029-30, mainly driven by an ageing population and the triple-lock guarantee. By the end of the decade, it’s estimated pensioner spending will be almost 50% of the total welfare bill. If the government is looking to cut costs, then pensioner spending could be something that moves into the Treasury’s crosshairs in the next few years.
“In practice, it’s not that simple. In its manifesto, the Labour Party pledged to protect the triple-lock guarantee, ensuring state pension increases match earnings or inflation if above 2.5%. But how long they can keep these promises remains to be seen. Once the state pension rises by 4.1% next month it will be at a level perilously close to the personal allowance of £12,570 and should overtake it in a couple of years if things continue, thanks to frozen tax thresholds. At that point the government will have a huge decision to make.
“The OBR forecast showed the significant fiscal impact that a rise in the state pension age can have on the nation’s finances. The rise from age 66 to 67 between 2026 and 2028 is set to slash borrowing by over £10 billion, as 820,000 fewer 66-year-olds receive their state pension. The temptation could well be to see if as much bang for buck can be delivered for future generations by bringing forward the planned increase to age 68.
“Any changes to the state pension will be hotly contested. But the crunch time is fast approaching when the government will finally be forced to address the question of how much the state pension should really offer, at what age, and how it can increase payments sustainably each year.”
