State pension under review as Government signals major retirement shake-up

According to the Department for Work and Pensions, the second phase of the Pensions Review will "consider the balance of all three pillars of the UK system – state, occupational and personal wealth".

It will also consider how best they should combine to ensure everyone can expect a financially secure retirement. The names of the reviewers and the full terms of reference will be confirmed in due course.

The announcement signals a potential shift in retirement policy that could include reassessing the state pension age, payment levels, and long-term affordability.

This comes at a time when the value of the state pension is rising sharply due to the triple-lock mechanism, while the personal allowance has remained frozen.

Rachel Vahey, head of public policy at AJ Bell said: "Pensions minister Torsten Bell recently ruled out scrapping the triple-lock guarantee, but as the state pension grows ever closer to the frozen personal allowance threshold it could be that the Government is finally forced to address the question of how much the state pension should really offer, at what age, and how it can increase payments sustainably each year."

The first phase of the Pensions Review was published in May and laid out a roadmap to reform workplace pensions.

A key part of this plan includes the creation of large-scale collective investment schemes, dubbed ‘megafunds’, which aim to increase returns for savers through greater investment scale.

The Pension Schemes Bill, published this week, sets out the legislative framework to advance these reforms.

Rachel Vahey, head of public policy at AJ Bell, said: "It’s now 20 years since the Turner Review was published.

"That comprehensive look at the UK’s retirement system ushered in a new regime for pensions, resulting in the introduction of landmark automatic enrolment reforms which changed pension saving in the UK forever."

While the details of the new review remain limited, it is already being compared in scope and ambition to the influential Turner Review of the early 2000s.

That review laid the foundations for automatic enrolment, now seen as one of the most successful policy interventions in UK pensions history. Since its implementation in 2012, more than 11 million people have been newly enrolled in workplace pensions, taking the total number of active savers to around 20 million.

Vahey said: "While details of this new Pension Review are thin on the ground at this stage, it has the potential to be as significant and could have far-reaching implications for people saving for their retirement."

One of the key concerns likely to shape the review is whether current contribution rates are high enough to support retirement goals.

Vahey continued "Not enough people are saving enough money for their later life, and although automatic enrolment has gone a long way to create millions of new pension savers, instead of resting on our laurels we now need to take a good look at whether they are saving a sufficient amount of money to realise their retirement ambitions."

However, the scope of the review is expected to extend well beyond contribution levels. It is likely to assess how state, workplace, and private pensions interact, which could bring the state pension under renewed scrutiny.

The review also appears set to factor in individuals' personal wealth, though the exact implications of this remain unclear.

With the state pension now nearing the frozen personal allowance threshold, there are increasing calls to examine its future role in a sustainable system.

Pensions Minister Torsten Bell has ruled out scrapping the triple-lock, but debate continues over how it can be maintained responsibly.

Vahey said: "Pensions minister Torsten Bell recently ruled out scrapping the triple-lock guarantee, but as the state pension grows ever closer to the frozen personal allowance threshold it could be that the Government is finally forced to address the question of how much the state pension should really offer, at what age, and how it can increase payments sustainably each year."

She added: "The Government now needs to clearly set out the terms of this review as soon as possible to give savers and the industry certainty over its plans."

With a rising ageing population and growing pressure on public finances, the decisions made in this review are likely to shape the UK’s retirement landscape for decades to come.