5 pension shocks facing those yet to retire

Do you have enough pension savings to retire on? Could the State Pension go bust? We explore the issues facing those yet to retire.

Will you have enough to live on in retirement?

Research shows that many people will not have enough pension savings and, as such, the Government recently announced it would revive the Pension Commission to address concerns over people facing a poverty-filled retirement. 

This makes sense as, at LoveMoney, we believe there are a number of reasons why pension savers should be concerned, from the likelihood that retirees will have to wait much later to take their State Pension to the viability of the State Pension itself.

Here are five retirement shocks that those of us yet to retire may need to prepare for.

1. Pensioners will be poorer

Pensioners could be much poorer in the future unless the pensions system is overhauled, Work and Pensions Secretary Liz Kendall has warned.  

Indeed, worryingly, Kendall has claimed that Britain is facing a “tsunami of pensioner poverty” because many workers are not saving enough towards their retirement, while almost half the working population is not contributing to a pension at all. 

As such, the Pension Commission is looking at ways to improve the system and ensure workers save more for retirement. 

One idea, the Guardian reports, is that auto-enrolment could start earlier, at the age of 22 for employees, while another is that workers could be made to increase their contributions, which are currently set at 8%. 

2. Workers will retire later

Today’s younger workers are also likely to have to retire much later than current retirees. 

Some commentators think that the government could have to increase the State Pension age dramatically in the future. 

The Institute for Fiscal Studies (IFS), a financial think tank, recently warned that the State Pension age may need to rise to 69 by 2048 and as much as 74 by 2068 due to funding issues and increased longevity.

The triple lock may also need to be abolished to reduce government spending on the State Pension. 

Currently, both men and women can draw the State Pension from the age of 66, rising to 67 from 2026. 

“Modelling in the 2022 Independent Review shows that the increases in the State Pension age required to keep spending on the State Pension below a certain level of national income would also have to be substantial,” the IFS report said. 

“That modelling shows that to keep public spending on the State Pension below 6% of national income while retaining the triple lock, the State Pension age would have to rise to 69 by 2048–49 and 74 by 2068–69.”

Meanwhile, research from the University of Bath has found that older workers are already delaying retirement due to the rising State Pension age, while younger workers are failing to save enough into their pensions. 

According to the publication Pensions Age, the research found a "clear" gap between expected and real-life retirement behaviour as younger employees expected to retire before hitting the State Pension age, while older employees were revising their plans closer to retirement. 

The research revealed that a one-year increase in the State Pension Age cut the likelihood of retirement by 8.2% for men and 6.4% for women.

Homeowners with an occupational pension were “significantly” more likely to retire once they became eligible for the State Pension, while those renting and without an occupational pension were less likely to.

Generation X employees – particularly women – were also found to be expecting to retire early but still work part-time, something experts say may be overly optimistic. 

3. The State Pension could go bust

Many people like to think that, after years of paying National Insurance, they are getting back their own money they have paid into the State Pension when they retire. 

However, some commentators have likened the State Pension to a giant Ponzi scheme, as pensioners are effectively paid out the cash that is currently being paid in by younger workers through their National Insurance payments. 

This is essentially how a Ponzi investment scheme works – new investors’ money is paid out to initial investors - and heightens the risk that the State Pension could eventually go bust. 

What’s more, a think tank recently warned that, partly due to the triple lock, the State Pension could become ‘fiscally unsustainable’ as early as 2036.

The Adam Smith Institute (ASI) said that this is because a higher ratio of people are claiming the State Pension each year versus the number of employees paying National Insurance (NI), as well as the cost of the triple lock.

This guarantees that State Pension payments will increase each year by whichever is the highest out of three figures: inflation, average earnings growth or 2.5%.

However, the cost of doing so has been rising much faster than anticipated.

The Government spending watchdog, the Office for Budget Responsibility (OBR), now forecasts that the cost of moving from an earnings-link in 2012 to the triple lock will hit £15.5 billion annually by 2030, three times more than was originally estimated.

Indeed, the Adam Smith Institute forecasts that by 2036, the Treasury will be spending more on welfare, the lion’s share of which is the State Pension, than it is receiving in National Insurance tax receipts.

“From that point onwards, it will rely on the National Insurance Investment Account Fund, which invests surplus funding back into the economy, to close the deficit," it said in a report. “From 2040 onwards, the Fund will begin to deplete.”

Maxwell Marlow, director of public affairs at ASI, said the Government should drop the triple lock immediately.

“It should alarm us all that the State Pension could become unsustainable in just over a decade,” he warned.

4. Pension tax relief could be cut

With Government coffers looking empty and Chancellor Rachel Reeves having little wriggle room within her fiscal rules, it is feared that she could take the axe to pension tax relief to save cash.

Currently, the Government tops up our pension contributions by 20% for Basic Rate taxpayers, 40% for Higher Rate and 45% for Additional Rate taxpayers.

Workers and employers saved £52.6 billion in tax last year due to relief on pension contributions, and commentators are concerned that the Treasury could target pension tax relief in the upcoming Autumn Budget. 

It’s thought that the Government’s pension tax relief bill is £78.2 billion. 

5. Pensions under scope of Inheritance Tax

Also, the Labour Government’s recent decision to include pensions in the scope of Inheritance Tax (IHT) when an individual dies will mean less money for their surviving partner. This is because they will no longer be able to claim a portion of their deceased spouse’s pension. 

From April 2027, pensions will be included in an individual's estate for inheritance tax (IHT) calculations, potentially subjecting those who inherit it to a 40% tax rate on amounts exceeding the nil-rate band of £325,000.

Currently, when someone dies, their beneficiary can receive their pension funds tax-free, depending on the deceased's age at their death. 

Experts are concerned that this may mean beneficiaries being taxed excessively. 

All in all, there are a number of issues that pension savers will have to bear in mind and tackle in the years ahead of their retirement. 

Find out more by reading our guide to retiring comfortably.