State pension payments must be means-tested and the retirement age raised to 70 to ensure payments are “fit for the future”, according to a leading think tank.
The Intergenerational Foundation is calling for fundamental reform to the state pension as the Government carries out a review into the status quo.
The Pensions Commission’s interim report has laid bare the scale of Britain’s retirement savings crisis, revealing that roughly 15 million working-age individuals, representing 43 per cent of the total, are on track to fall short of adequate income in later life.
This commission, which is due to deliver its final recommendations in 2027, aims to build a pension framework that is “adequate, fair, and sustainable” by 2050.
Should the state pension be means-tested?
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Its interim findings acknowledge considerable progress since the early 2000s, with nine out of ten eligible workers now enrolled in workplace schemes and pensioner poverty having declined markedly.
Close to half of working-age people are not contributing to a pension in any given month, and a mere 17 per cent of self-employed workers are saving into one.
Connor Nakkan, a senior researcher at the think tank, argued that the Government should contemplate increasing the state pension age to 70 by 2035.
This would include subsequent rises linked to longevity, specifically, a two-year increase for every three years added to life expectancy.
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He stressed that such a shift would need to be paired with stronger protections for disabled people, carers, those in manual occupations, and individuals suffering from poor health.
Mr Nakkan also took aim at the triple lock, warning that “maintaining the triple lock will push up state pension spending in an arbitrary and unpredictable way”.
He called for greater use of means-testing, arguing that shielding wealthier retirees comes “at the expense of poorer pensioners and younger workers.”
On private pension saving, Mr Nakkan urged the UK to move beyond automatic enrolment towards a more robust mandatory system.
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The statutory minimum contribution currently stands at eight per cent of qualifying earnings, with employers required to put in just three per cent, a figure that has effectively become the default rate for many workers.
By contrast, Australia’s superannuation guarantee obliges employers to contribute 12 per cent of ordinary earnings, highlighting the gap between the two systems.
The Intergenerational Foundation wants minimum contributions raised gradually, with employers shouldering a greater proportion of the increase.
It also advocates lowering the automatic enrolment age from 22 to 18 and reducing the earnings trigger so that more low-paid workers and those juggling multiple jobs are brought into the system.
Mr Nakkan further argued that workers who remain in paid employment beyond state pension age should no longer be exempt from employee National Insurance contributions, instead paying on the same basis as their younger colleagues.
He said: “People who remain in paid work above state pension age should also lose their exemption from employee National Insurance contributions and contribute on the same basis as younger workers. The UK needs a pensions system that is fit for the future.”
Some four million employees currently fall outside automatic enrolment due to its age threshold and the £10,000 earnings trigger, leaving a substantial portion of the workforce without any workplace pension provision.