The balance of a fund that pays the state pension is expected to “fall rapidly to zero around 2032”, according to the Government Actuary’s Department (GAD).
This could mean workers under age 50 face paying more out of their income to maintain the state pension.
State pension is the main benefit (over 90% of the expenditure) paid from the Great Britain National Insurance Fund, which is financed by workers’ and employers’ national insurance contributions.
But the most recent five-year review from the GAD (published in October 2017) warns that if the fund continues to cover the current form of state pension and other benefits, either the fund’s income has to rise or expenditure has to be controlled.
In its December 2017 newsletter, the GAD says: “The current balance in the fund is comparatively low: just over 1/5th of annual expenditure on benefits.
“Although it is expected to increase until 2025, after this the balance is expected to fall rapidly to zero around 2032. The previous review similarly showed that the fund was likely to be exhausted by the mid-2030s.”
It suggests that a short-term solution to boost the fund’s value is for Parliament to approve a ‘Treasury Grant’. A longer-term view, however, is to increase national insurance contributions – the GAD suggests a 5% rise could be needed.
Currently, national insurance is 12% of employee’s pay for those earning £680 to £3,750 a month. See Moneywise’s 2017/18 tax rates guide for more information on this.
‘Latest analysis paints a grim picture for the future of the state pension’
Tom Selby, senior analyst at AJ Bell, comments: “The latest analysis from the government’s own actuary paints a grim picture for the future of the state pension. The harsh reality is that, as demographics bite and the Baby Boomers flood towards retirement, the cost of the state pension will inevitably balloon.
“In fact the Government Actuary predicts the fund used to pay out benefits will be exhausted in around 15 years’ time, at which point the Treasury will have to step in to ensure people continue to receive their state pensions.
“These Treasury grants will kick in at £11.6 billion a year in 2030 and increase rapidly to £151 billion by 2060 and £482 billion by 2080 if the system stays as it is. The options open to policymakers to plug the funding gap are not attractive. The government actuary reckons a 5% increase in national insurance contributions would do the trick – hardly a realistic route for any politician wanting to maintain a grip on power.
“Alternatively, the state pension age could rise further, the value of the payment could be cut or other departments could have their budgets drastically reduced. In reality, long-term costs will likely be reined in by a combination of the above, but make no mistake – if this nettle is not grasped today, it will be forced on policymakers tomorrow.”
The Moneywise view
In December it was revealed that the UK’s state pension is the least generous amongst 35 advanced economies, with Turkey, Portugal and the Netherlands ranking top for their far superior schemes.
These shocking findings, together with the latest news about the grim prospects for the state pension fund, highlight the importance of not relying on the UK state pension.
If you are self-employed, don't work, or want to supplement your workplace scheme, a personal pension is a sensible way to save for retirement. Read our Guide to personal pensions.
Visit Moneywise’s pensions section for more of the latest news, information, and advice.
Labour stopped paying in also under both Blair and Brown