The state pension – a creaking centenarian

CPD: The state pension is an essential retirement staple for the entire UK, but Stephanie Hawthorne questions whether the system is still fit for purpose



March 18 2022

The state pension, the bedrock of UK retirement provision, is the hottest of hot political potatoes, with daily controversy raging on the triple lock, Scottish independence fallout, gender disparity, state pension age and even the very long-term survival of this creaking centenarian.

Where did it all begin?

The Old Age Pensions Act 1908 saw the introduction of the state pension, initially means tested at the princely rate of five shillings a week at the age of 70. It was awarded to people resident in the UK for at least 20 years, who could be disqualified if they had made themselves poor to qualify, had been imprisoned or convicted under the Inebriates Act.

In 1908, according to the Pensions Policy Institute, life expectancy at birth was just 40 years for men and 43 years for women. Only one in four people (24 per cent) reached the SPA of 70, living on average just a further nine years. By contrast, in 2017, around 85 per cent people reached their SPA with a life expectancy at that time of 24 years, more than twice as long, posing question marks over its continued affordability.

Today, the new state pension is £185.15 a week, as of April 2022. Since 2010, its value has risen in line with the triple lock — the highest of inflation, earnings and 2.5 per cent. But there are no guarantees, and this year the government has stepped back from its manifesto commitment, linking it just to inflation.

Indeed, “taking into account the expected 3.1 per cent increase due to high inflation, the state pension is hardly a fortune, paying less than £9,000 a year on average and leaving around a quarter of pensioners reliant on means-tested benefits to top it up”, says Caroline Abrahams, charity director at Age UK.

Cheese paring by global standards

The UK government pays just over 12.4mn state pensions, with around 1.15mn pensions paid outside the UK, often frozen, spending 4.7 per cent of gross domestic product versus an OECD average of 6.5 per cent.

However, a Department for Work and Pensions spokesperson told Pensions Expert that “it is not possible to make realistic comparisons internationally between state pension levels due to differences between countries, such as tax and healthcare systems, access to occupational pensions, and the availability of other welfare benefits”.

“The state pension is hardly a fortune, paying less than £9,000 a year on average and leaving around a quarter of pensioners reliant on means-tested benefits to top it up”
Caroline Abrahams, Age UK

David Robbins, senior consultant at Willis Towers Watson, backs this assessment: “In the past, the OECD classed UK workplace pensions as voluntary. So, unlike in many comparator countries, only state pensions got counted. 

“Now, the OECD has recategorised the UK’s automatic enrolment system as ‘quasi-mandatory’, which pushes it up the league table.”

Most people have no idea that their state pension is a ‘benefit’ rather than a ‘right’. Former pensions minister Baroness Ros Altmann explains: “There is no fund building up to pay their pension from and there are no guarantees as to what they will ultimately get — there are just indications of what they might receive if current rules stay in place.”

In ghastly pensions jargon, the state pension is called a ‘pay as you go system’. There is the National Insurance Fund, but it is not specifically earmarked for paying pensions, which are paid out of taxation and NI receipts on a contributory basis since 1925. 

Serps and all that

In 1978, attempts were made to boost the state pension with a top-up plan called the State Earnings-Related Pension Scheme by the Labour government — with a maximum benefit of 25 per cent of earnings — and subsequently the second state pension in 2002, with lower benefits than the original Serps.

People were encouraged to leave Serps with lower national insurance contributions. Initially, only defined benefit pension members could contract out of Serps, but, in 1988, the government extended it to defined contribution members. About three-quarters of all current retirees were contracted out of paying full NI. 

People with contracted-out pensions built up during 1978 to 1997 have a guaranteed minimum pension. This has caused employers endless grief over rectification and equalisation issues. 

The pension scheme roughly tops up the state pension shortfall with the contracted-out pension equivalent — yet more impossible pensions jargon. The arcane calculation is based on the rules of each individual workplace scheme.

The option of contracting out in return for lower NICs ended for DC schemes members in 2012 and DB members in April 2016.



2016 big bang

2016 was a ‘big bang’ year for state pensions, with a new system introduced for men born on or after April 6 1951 or women born on or after April 6 1953. 

The new state pension accrues at 1/35th for each year the individual has full NI credits. “Based on the 2022-23 tax year new state pension, each year you work you will accrue £185.15 per week/35 = £5.29. This is a weekly figure, which increases each year,” explains Claire Trott, divisional director of retirement and holistic planning at St James’s Place.

If the saver has fewer than 10 years NIC, they get nothing. There are two systems in play for pre-2016 and post-2016 retirees. 

It will be decades before we reach the nirvana of simplicity. Post-2016 retirees get the new state pension of £185.15 a week, while pre-2016 retirees get the basic state pension increasing to £141.85 a week in 2022-23.

Everyone who contracted out in the past of paying the full NIC will find that this may hugely dent the amount of new state pension they get, even if they have paid the full 35 years of contributions.

The rollout of the new state pension and its impact is complicated, as successive reforms and penny-pinching have left us in a Byzantine mess. Indeed, Altmann says: “The DWP itself does not have enough people who can correctly calculate people’s state pension. LCP has published a useful guide to help people understand how contracting out affects their state pension.”

Former pensions minister Sir Steve Webb, a partner at LCP and one of the architects of the new system, is optimistic: “With every year that passes, the percentage of newly retired people who get the standard flat rate will increase and reach around 80 per cent by the end of this decade.

“In the old system, women with poor NI records could derive pension rights from a husband, an ex-husband or a deceased husband. Under the new system, with limited transitional exceptions, pensions are based wholly on an individual’s contribution record.”

“Taxation of child benefit where one member of the household has income over £50,000 has left many women missing out as they don’t claim the benefit”
Kay Ingram, Ingram Insights

Under the new system, Webb adds: “NI credits (eg, for time at home with young children or caring for a disabled person) are worth just as much as a year of NI contributions. A year of caring for a child or a disabled person earns you just as much state pension as a year running a FTSE 100 company.”

While NI credits are available for parents of children under the age of 12 (17 if disabled) and adult carers, Kay Ingram, chartered financial planner at Ingram Insights, warns: “These are not offered as a standalone benefit. They are linked to claiming other benefits, namely child benefit and carer’s allowance.” 

She adds: “Taxation of child benefit where one member of the household has income over £50,000 has left many women missing out as they don’t claim the benefit. Carer’s allowance is contingent on the person being cared for claiming attendance allowance. With many adults not taking this up, their unpaid carers miss out on credits.” 



Working until you drop? 

Separate SPAs for men and women were introduced in 1940 — age 65 for men and 60 for women, with a decision to equalise the SPA for men and women trailed in the 1993 white paper ‘Equality in state pension age’. Now that the same age applies for both men and women, at 66, there is still huge controversy over the notice period and quality of information given to women over the age of 50 on the exact timetables for this change. 

Demography has increasingly put the whole system under strain. Andrew Tully, technical director at Canada Life, warns:By 2045, the number of people of pensionable age will grow to 15.2mn, an increase of 28 per cent on the level in 2020. The ‘oldest old’ cohort is also increasing, with the number of people aged 85 and over projected to almost double to 3.1mn by 2045. 

“At the same time, the working age population will increase by much less — around 4.5 per cent up by the mid-2030s, but then remaining around that level by 2045. Meanwhile, we are seeing a decrease in the number of children, with those aged 0 to 15 projected to fall by nearly 9 per cent by mid-2030.”

Alan Morahan, chief commercial officer at Punter Southall Aspire, cites Office for National Statistics figures from October 2011: “There were 3.6 people working and paying NI for every one person receiving state pension. By 2009, this ratio had reduced to 3.2 to one and the government determined that if this trend were to continue, then by 2051 there would be a ratio of only two to one.”

Since 2014, the government has had to regularly review the SPA. In 2017, John Cridland’s independent review recommended that the SPA should continue to be universal across the UK, increasing over time to reflect improvements in life expectancy. 

The pace of change should be steady and evenly spread across generations, and on this basis the SPA should not increase by more than one year in any 10-year period, with 10 years’ notice of change. The latest review was launched on December 2021, with its findings to be published by May 2023.

“It seems unlikely that a government grappling with the challenges of an ageing population in the wake of a pandemic would unpick a pension age increase that is already on the statute book” 
David Robbins, Willis Towers Watson

The SPA is currently set at age 66 with a gradual rise to 67 for those born on or after April 1960, and a rise to age 68 between 2044 and 2046 for those born on or after April 1977. 

WTW’s Robbins comments: “In 2017, the government said it was ‘minded’ to target a situation where people reaching SPA in the long run could, on average, expect to spend 32 per cent of their adult lives in retirement. If you plug the latest ONS projections into that formula, it points to the SPA starting to rise above 67 in 2054 and reaching 68 in 2056.

“The government may well want a faster timetable, which may be why one of the questions in the independent review’s terms of reference is ‘whether it remains right for there to be a fixed proportion of adult life people should, on average, expect to spend over SPA?’”

When parliament legislated for the SPA of 67 in 2028, the ONS projected that men aged 67 in 2028 would on average live a further 21.3 years and women 23.8 years, but the latest projections give much smaller life expectancies: 18.7 for men and 20.8 for women, respectively. 

Robbins says:  “It seems unlikely that a government grappling with the challenges of an ageing population in the wake of a pandemic would unpick a pension age increase that is already on the statute book.” 

Nevertheless, any increase in the SPA could unfairly hit deprived areas and wreck the government’s levelling up agenda. For example, females living in Blackpool have eight years less healthy life expectancy than the UK average.

Indy Scotland fears

One potential minefield is who should bear the liabilities for the Scots’ state pension if Scotland were to leave the UK. Unsurprisingly, Ian Blackford, leader of the Scottish National Party in the House of Commons, believes it is the UK government’s responsibility, as is the case for UK expatriate pensioners living in France, for example. However, few experts accept this argument.

Penny Cogher, partner at Irwin Mitchell, warns: “There is no certainty for Scottish voters on this point,” adding that “there is little in the way of historic precedent”.

She says: “There is no guarantee under international law that a successor state is entitled to receive money to pay for state pensions. When Montenegro voted for independence from Serbia in 2006, it is understood that only military personnel in Montenegro were able to recover pensions from the Serbian government. However, comparisons here are limited given the very different historical and economic placings of those countries.”

Canada Life’s Tully argues: “The current pensions minister has been very clear on this. As did the SNP independence manifesto from 2014. At the point of the creation of an independent state, Scottish taxpayers would pick up the tab and pay the state pensions of Scottish pensioners.”

Chris Noon, partner at Hymans Robertson, agrees, adding that “the Scottish taxpayer would pay for it”.

Tom Selby, head of retirement policy at AJ Bell, says: “This debate appears to be fuelled by confusion over exactly how the state pension system works at the moment.  The reality is that state pensions paid to today’s pensioners are funded from general taxation, whether those taxes are badged income tax, NI or something else is irrelevant.

“Once you recognise this fact, the idea that some sort of compensation will be necessary in relation to taxes paid becomes faintly absurd. All UK citizens pay taxes and these taxes fund state spending across the UK, including on pensions.” 

He continues: “An independent Scotland would have to decide on its own state pension structure and then establish tax rates in a way to fund that structure, in the same way taxes fund all other areas of government spending.”

Altmann warns that the problem is complex, citing not least among the many issues that there are “contributions made by UK people who move between Scotland and England”.

Pressure for flexible ages 

Many have concerns for those with a few years to go before receiving their state pension, who are unable to work because of unemployment, ill health or caring responsibilities and so are reliant on universal credit instead. This was never designed to meet these needs. 

Age UK’s Abrahams stresses: “Life is grim for these people, whose numbers will be mushrooming as a result of the pandemic. They should have early access to their full state pension to help them get by. The government should also lower the age of eligibility for benefits for these people, such as pension credit and housing benefit.”

Altmann agrees, noting that the next review “should consider adding some flexibility to the SPA, so that those who are genuinely not able to work can still receive some pension earlier”. 

“Otherwise, more people will be disadvantaged.” She argues that all the add-on pensioner benefits should be rolled into the state pension, with one simpler payment that is taxable.

Still reliant on paper

Prompt and accurate payment of pensions could be improved, according to Ingram, who notes: “The DWP needs to digitalise its records and maintain records after payment starts, so that any errors can be more easily rectified. 

She adds: “Public trust has in recent times been shown to be misplaced, with thousands of women underpaid state pension by £3bn, according to Treasury estimates.”

“Too many women are still losing out — the system is far too complex, and the level of pension is too low”
Baroness Ros Altmann, former pensions minister

Altmann agrees: “Too many women are still losing out — the system is far too complex, and the level of pension is too low. Indeed, gender equality is not expected to be reached until the 2040s.” 

More could be done, with suggestions that the DWP and HM Revenue & Customs could identify women with few NICs and make them aware of the availability of credits to build up their entitlement. 

Ingram points out: “HMRC has recently spent £66,000 advertising these credits on websites aimed at mothers and carers. Why can’t they write to every adult for whom they have no NI record to make them aware of the link to state pension entitlement?”

State pension forecasts are available from These estimates show if the saver is on track, any gaps in the individual’s NI record, and give them time to plan. But St James’s Place’s Trott points out that the website “is still mostly written in a way that is hard for a lay person to digest, and in some cases hard for someone in the industry too”.

She adds: “Making information easier to read and understand would go a long way to help people engage. As an industry, we are encouraged to use plain English and reduce the use of jargon to help customers, this should apply across the board.”