Will Labour make these big changes to the state pension?

Liz Kendall, Secretary of State for Work and Pensions. Credit: Carl Court/Getty Images

Next April, retirees will get another bumper increase to the state pension, which is expected to rise by 4%, equating to a further £460 over the course of the year.

The increase will bring the full state pension up to nearly £12,000 a year, but as retirees have been quick to point out, the hike isn’t quite so attractive once you consider the removal of the winter fuel payment for all but the poorest.

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Labour has made no secret of the fact that there will be difficult and painful decisions to be made in the upcoming Budget (on 30 October). And, after both the removal of the winter fuel payment and repeated promises not to increase taxes for working people, it’s understandable that retirees are concerned.

Public opinion aside, the cost of the state pension makes it a logical candidate for cost saving. In 2022-23 it cost the government a staggering £110.5 billion – its biggest benefit expenditure, accounting for 42% of the total welfare spend, according to the Office for Budget Responsibility (OBR).

Making fundamental changes to the state pension is always politically dangerous and it’s impossible to know exactly what the government has in store, both in next month’s Budget and during the rest of this Parliament. Nonetheless there are plenty of ideas being mooted.

Here we take a look at some of the things the government might be considering.

Continuing with the freeze on income tax allowances

One of the stealthiest ways the government could target the state pension is to engender a situation where increasing numbers of people start to pay tax on it.

The stubborn refusal to increase the personal allowance, means increasing numbers will start paying tax on their state pension, while those who also have private pensions will pay tax on a larger proportion of their overall income.

After next April’s estimated increase, the full state pension will reach close to £12,000 a year, inching towards the personal allowance, which has been frozen at £12,570 since 2021, and will remain at this level until 2028 at the earliest.

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The OBR has estimated that the collective freezing of personal tax thresholds will increase tax receipts by a combined £29.3 billion a year – equivalent to a 4p increase to the basic rate of tax by 2027-28.

According to analysis from pensions consultancy LCP, some 2.5 million pensioners on the basic state pension – who reached state pension age before April 2016 – are already paying tax on their state pension income. This is down to the complex nature of the basic state pension which sees some pensioners get additional payments.

Triple lock

The triple lock guarantees that the state pension will increase each year by the greater of 2.5%, inflation and average wage growth.

Reports suggest this costs the government around £10 billion a year. But the triple lock isn’t just expensive, it’s uncertain too, making it difficult for governments to plan.

That means the policy has long been something of a political hot potato. Dropping the policy would free up billions of pounds but no party wants to be the one to do it.

Labour did pledge to maintain the triple lock in its run-up to the election and it’s unlikely it will go back on that promise.

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Nonetheless that doesn’t guarantee its survival in the future. Back when he was the Conservative’s work and pensions minister, Mel Stride, admitted that the triple lock was “unsustainable”over the longer term.

At the end of last year, the Institute for Fiscal Studies (IFS) also published a report proposing that the triple lock should be scrapped. It favoured “a four-point plan” to increase confidence in the state pension, with increases linked to wages to ensure pensioners’ incomes keep pace with rising living standards.

In the nearer term there also remains the possibility for subtler tweaks to the triple lock or temporary changes in challenging years. Back in 2022, the Conservatives, for example, temporarily suspended the earnings part of the triple lock with fears that pandemic induced wage distortions would make it unaffordable.

In 2023, there was also talk of stripping public sector bonuses out of earnings growth figures to keep them down. Although that didn’t happen, it is an indication of the type of tinkering that could come into play.

Increasing the state pension age

More state pension age rises are on the cards.

The current state pension age is 66 for both men and women but it’s scheduled to increase to 67 between 2026 and 2028 (affecting those born after April 1960) before going up to 68 between 2044 and 2046 (affecting those born after April 1977).

However, this schedule could still be changed. The state pension age is subject to regular independent review and the next one will take place during the current Parliament.

This could, potentially, bring forward the increase to age 68.

Although previous governments have rejected recommendations from these reviews, calls are once again mounting to speed up the rate of increase. The London School of Economics, for example, recently published a report recommending that the increase to 68 takes place as soon as possible.

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Similarly, the International Longevity Centre (ILC) has said that to maintain the existing ratio of workers to pensioners, the state pension age would need to reach 70 by 2040 – a rate of increase that is much faster than the current schedule.

The next review will take in wide-ranging evidence, including life expectancy and population projections, demographic trends, the state of the economy and the impact of measures to address inactivity in the labour market. It will also consider the impact of recent economic challenges such as global inflation and the Covid pandemic.

Central to the decision is the amount of time the typical adult will spend in retirement – with the current recommended metric, 31%. It’s also recommended that the cost of the state pension shouldn’t exceed 6% of GDP.

After the most recent periodic review was published in 2023, the former government also committed to providing 10 years’ notice for any increase to the state pension age.

Means-testing

The new state pension is paid at its full rate to everyone with 35 years of national insurance contributions (NIC).

However, one of Chancellor Rachel Reeves’ tax advisers, Edward Troup, recently suggested that “perhaps wealthy pensioners should be giving up their full state pension”.

Meanwhile, earlier in the year, the economist David Blanchflower, who previously sat on the Monetary Policy Committee (MPC), suggested that the state pension needed to be increased but with an element of means-testing.

Former pensions minister, Steve Webb, who is now a partner with pensions consultancy LCP, has described means-testing as the “nuclear option”.

Will any of these things actually happen?

Providing the bedrock of our retirement income, changing the state pension is a bold and risky move for any government.

Labour will be considering both the public backlash that could result and the impact any change would have on the public purse.

There seems to be widespread acknowledgment that some changes – for example the scrapping of the triple lock – will be needed at some point, even if it’s years down the line.

However, Steve Webb told ii that he didn’t think any change would be imminent. He gave us his views on the likelihood of change in some key areas.

State pension age: “By law, there has to be another review during the lifetime of this Parliament; but my view is that this is a ‘no-brainer’ for Labour;  they’ve been critical of the rises that have already taken place and the rise from 67 to 68 isn’t due until 2044-46, so bringing that forward would be unpopular but wouldn’t raise extra money over a politically useful timetable; on that basis I’d be astonished if they made any major changes.”

Triple lock: “They’re committed for this Parliament in the manifesto, and I’d be surprised if they broke that pledge; but they may think that getting rid of the triple lock is best done well outside the election timetable, so a key question will be if they prepare the ground now for dropping the triple lock in future - eg after 2030, or once the pension reaches X% of the average wage.”

Means-testing: “Again, I’d be amazed if they went down this route; it’s inconceivable you could do this to today’s pensioners, and hard to do it for those approaching pension age; so if you did make a change you’d annoy millions of people but the money wouldn’t start flowing in for years to come.”