TBI calls for biggest overhaul of state pension since its inception

The Tony Blair Institute for Global Change (TBI) today argues that Britain needs to move beyond piecemeal pension tweaks and replace the current state pension with a new Lifespan Fund – a more flexible model of state-backed income support built for longer and more fluid lives.

In a new report, TBI argues the current state pension is outdated, increasingly unaffordable, and too rigid for the way people live and work.  It was designed for a more linear model of life, concentrating state-backed income support at retirement, even though people often need it much earlier – to retrain, change careers or take on caring roles. 

Reform is now unavoidable. Britain has 12.6 million pensioners today, but this will rise to nearly 19 million by 2070. On current policy, state pension spending is projected to rise from around 5 per cent of GDP today to 7.8 per cent by 2070 – an extra £85 billion a year in today's terms. That would mean higher taxes, deeper pressure on other public services, or both.

TBI argues that the first step must be to prevent the state pension rising faster than earnings growth by scrapping the triple lock. It also calls for the recently re-established Pensions Commission to foster cross-party agreement before the next election, paving the way for the triple lock to be replaced from 2030 with a smoothed link to earnings. 

But that should be only the start. The report argues that Britain now needs a more fundamental redesign of the system. 

Under TBI's proposed Lifespan Fund:

• People would build up entitlement through contribution across their lives – including through work, caring, study and other recognised activity – with each year of contribution adding to a notional fund that would provide up to 20 years of state-backed support at the level of today's state pension.
• People could bring forward some of that entitlement during working life, under clear rules and with safeguards – for example during unemployment, retraining or caring – to provide income support at critical points in life, supporting both employment outcomes and family security. Those who chose to do so would then be automatically enrolled into higher National Insurance contributions when they returned to work, creating a default path to rebuild what they had drawn down.
• Access to pension support later in life would no longer be tied to a single State Pension Age, but would instead become personalised – allowing people to choose when to convert their Lifespan Fund into a guaranteed pension for life, with the annual amount adjusted on an actuarially fair basis to reflect age and health. This would replace a one-size-fits-all pension age that penalises those in poorer health – often those on lower incomes and with shorter life expectancy – with a fairer system that better reflects differences in health and lifespan. 

On TBI's estimates, these reforms would hold long-run state pension spending at around 5.5 per cent of GDP, rather than allowing it to rise towards 7.8 per cent, avoiding roughly £66 billion a year in additional costs by 2070 (in today's terms). 

The report argues that this would create a state pension system that is more affordable, more flexible and fairer – one that keeps the principle of universal support in later life, but redesigns it for longer lives, changing work patterns and greater choice over how and when support is used.

Tom Smith, Director of Economic Policy at the Tony Blair Institute said:

“Britain's state pension system was built for a different era. We can't keep pouring money into a system that is increasingly unaffordable. Pension spending must be contained, and that means the triple lock cannot continue after the next Election. Ending it will require political leadership from all parties – but that should only be the first step. Real reform must also build a better system: one that is fairer, more flexible, and designed for how people live today.

“TBI's proposed Lifespan Fund offers that better alternative. It replaces the one-size-fits-all state pension with a personalised system that people build up through active contribution across their lives. It gives people real freedom to use support earlier in life – to retrain, care for relatives or manage periods out of work – and to top it back up before retiring on their own terms. It keeps the promise of a secure retirement while making the system more flexible and financially sustainable – a new “grand bargain” that offers people more choice, greater transparency and fairer access to income support over the course of their lives. It is the upgrade Britain needs.”

ENDS

Notes to editors:

How the Lifespan Fund would work in practice

• Building up entitlement through contribution
  Each full year of recognised contribution would add half a year of Lifespan entitlement, up to a maximum of 20 years of support – equivalent to average entitlement pensioners can expect to receive today. In practice, that means people could build a full record over 40 years. Entitlement would continue to be earned through work via National Insurance contributions, and through existing National Insurance credits for activities such as seeking work, caring, or being unable to work because of ill health. Under the proposal, full-time education would also count, so that time spent building skills is recognised as a contribution too.
• Using part of the fund earlier in life
  Unlike the current state pension, the Lifespan Fund could be used not only in retirement but also, within limits, during working life. People would be able to draw on it for time-limited periods of income support when taking time to find a suitable new job, retrain, study, care for children, or care for a sick or disabled family member. The principle is that early access would be allowed only for activities that strengthen future earning potential or support other socially valuable responsibilities – not for general leisure or extra consumption.
• Minimum balances to protect retirement income
  Early access would only be possible once someone had built up a minimum balance, and withdrawals could never take the fund below that level. The minimum balance would rise with age: with a minimum of five years of entitlement for those under 35, to ten years for those aged 55 and over. This is designed to ensure that flexibility is earned rather than automatic, while also guaranteeing a minimum level of support for later life (10 years is consistent with the average time people spend in ill-health later in life).
• Automatic rebuilding after early withdrawals
  Anyone who used part of their fund during working life would be automatically enrolled into slightly higher National Insurance contributions when they returned to work, helping them rebuild what they had withdrawn. These top-up contributions would be set at 5 per cent of earnings though people could choose to repay faster or slower, or opt out of the extra contributions if they had enough private pension saving to make up for the amount they had taken out.
• Turning the fund into a guaranteed pension
  At older ages, people would be able to convert their Lifespan Fund into a guaranteed pension paid for the rest of their lives. Through a secure Lifespan App, they would be able to see their accrued balance and the pension income it could provide if they retired at different ages. This would allow people to choose when to retire, instead of everyone being tied to a single State Pension Age.
• A more personalised pension in later life
  The annual pension someone received would depend not only on the size of their fund, but also on their age and health when they converted it into a pension. This would be done on an actuarially fair basis, using population data and information from an NHS digital health record. In effect, the system would move away from a one-size-fits-all pension age and towards a more personalised model that better reflects differences in people's health and life expectancy – similar to private pension annuities.
• Protection against poverty in retirement
  People who wanted to retire early, or whose Lifespan Fund was relatively small, would need to show that they had enough private pension income or other retirement savings to ensure a total retirement income of at least £12,500 a year – around the current value of the full new State Pension. If not, they would need to wait longer before converting their fund into a pension. This is intended to preserve flexibility without increasing the risk of poverty in later life.
• Safeguards against drawing down too much too early
  The proposal includes two main fiscal safeguards. First, everyone would be required to retain at least a minimum Lifespan balance equivalent to ten years of entitlement, ensuring a basic level of support at the point in life when most people are least likely to be able to work. Second, for the small minority of people who still reached later life without building even that minimum, Pension Credit would be replaced with a means-tested Lifespan top-up. This would lift their balance up to the ten-year floor, while being means-tested against private pension wealth and other savings. The aim is to maintain a minimum level of support without encouraging people to draw down early and then rely on more generous means-tested support later.
• Keeping the value of support stable over time
  The value of each person's Lifespan Fund would rise in line with a smoothed link to median earnings, so that support kept pace with living standards over the long term while never falling in real terms. From 2030, this would replace the triple lock for all state pensions, including those already being paid, helping to maintain pension value while making long-term costs more predictable.
• A Lifespan App for transparency and control
  The whole system would be supported by a secure digital platform – the Lifespan App – through which people could see their balance, check whether they were eligible for withdrawals, view their projected pension at different ages, and track progress in rebuilding their fund if they had used some of it earlier in life. The aim is to make the system much more transparent and easier for people to understand and plan around.

Taken together, these design features are intended to create a system that is more flexible, more affordable and fairer than the current state pension.