A shake-up of pensions is imminent amid concerns that we are all chronically undersaving for retirement and that the state pension is about to go bust.

Rachel Reeves is expected to announce a pensions review tomorrow before parliament breaks for summer recess. One change on the table is an increase to the minimum amount saved into workplace schemes under the auto-enrolment rules. This is unlikely to go down well with businesses, which have already shouldered a £25 billion increase in national insurance contributions.

Reeves will also address another elephant in the room — the survival of the state pension. It is on track to become completely unsustainable by 2036 due to the triple lock, which promises that the pension will go up by the highest of inflation, average wage growth or 2.5 per cent every year — whichever is higher.

Liz Kendall, the work and pensions secretary, said last week that she was very concerned about how much savers were putting aside for later life. But overhauling private retirement pots or the state pension will not come free, and someone must foot the bill. So who will pay for pension reform, and how much will it cost you? We analyse the changes.

A higher state pension age

The government spent £138 billion, about 5 per cent of GDP, on the state pension in 2024-25 — the second largest chunk of the government budget after health, according to the Office for Budget Responsibility (OBR).

The new state pension, worth a maximum of £11,973 for this tax year, is paid to those who reached state pension age after April 2016. You need at least 35 years of national insurance contributions to get the full amount and ten years of contributions to get anything.

Labour has committed to keeping the triple lock, but the sums do not add up. The tactic used by successive governments to prop up the state pension system has been to increase the age at which workers qualify. This will increase from 66 to 67 by 2028, and again to 68 between 2044 and 2046.

The Institute for Fiscal Studies (IFS) has calculated that the state pension age would need to rise to 74 by 2068-69 to keep funding the triple lock.

Steve Webb, a former pensions minister and partner at the consultancy LCP, said: “There has to be a review of state pension age by law once each parliament, and the next is due shortly.”

The government must give ten years’ notice of any changes to the state pension age, so there is enough time for it to increase it to 68 sooner than planned. But Webb said such a move would be politically damaging. “Because of the ten-year lead time any government which makes a change gets no extra revenue to spend in the current parliament or the next — but all the political flak.”

• The exact year that the triple lock will bankrupt the state pension

Reeves may have no choice, however, if she is to keep her party’s promise to maintain the triple lock — which the OBR said will add £23 billion a year to the cost of the state pension. The last review of the state pension age suggested its increase to 68 should be brought forward to 2037.

By then the state pension could be worth roughly £16,000, assuming it rose 2.5 per cent each year, so anyone still wanting to retire at 67 would need to find this amount from other savings to keep their income on track. Putting aside an extra £1,000 a year until 2037, assuming 4 per cent growth after fees, would give an extra £15,600, according to the investment firm AJ Bell.

Rachel Vahey from AJ Bell said: “Any cash-strapped government will have no choice but to find a way to curb its spending on the state pension as the pensioner population keeps growing.”

No more triple lock

One of the nuclear options would be to scrap the triple lock promise and make increases less generous.

Webb said: “The manifesto commitment to the triple lock seems likely to hold; the fact the triple lock was used repeatedly last year in defence of the winter fuel payment changes, and it would further undermine government support among pensioners if it was now watered down.”

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But he said all political parties would be looking at ways to drop the triple lock commitment beyond the next election, which will be no later than 2029. “It would be a brave chancellor who grasped the nettle of rising state pension costs given that any change is likely to be highly politically contentious while generating little additional revenue in the short term,” he said.

Bigger tax burdens

The government is already clawing back pension income through a deep freeze on income tax thresholds. These have not changed since 2021 and will stay the same until at least 2028, dragging more people into paying tax, or higher tax brackets. Sir Keir Starmer has refused to rule out extending the freeze on tax thresholds.

The full state pension is forecast to exceed the £12,570 personal allowance (the amount you can earn a year before paying income tax) within three years.

Webb said: “Every time allowances are frozen, the government gets a bigger share of its state pension spend back through more people paying tax on their income in retirement, and more of those people going into higher tax bands.

“But the government will see this as a tax change which increases tax revenue, not a way of cutting public expenditure, and so it won’t alleviate the pressure to break the triple lock or raise the state pension age.”

Higher costs for employers

Increasing minimum pension contributions under the auto-enrolment rules are expected to be a key part of the government’s review. Under auto-enrolment, which was introduced in 2012, all salaried workers over 22 who earn more than £10,000 a year are automatically signed up to workplace pension schemes.

Employees must contribute a minimum of 5 per cent of qualifying earnings between £6,241 and £50,270, and employers pay 3 per cent. Outside qualifying earnings, contribution rates are up to the employer.

But workers are still not saving enough for their retirement. A survey by the pension firm Scottish Widows found that half the workers who saved the auto-enrolment minimum would only have the £14,800 a year needed for a basic lifestyle in retirement while more than a third were at risk of having less.

This differs from the public sector, where generous taxpayer-funded contributions ensure bigger pension pots and a higher living standard in retirement.

Teachers get employer contributions of 28.7 per cent, and contribute between 7.4 per cent and 12 per cent themselves. NHS workers get 23.7 per cent contributions, adding between 5.2 per cent and 12.5 per cent themselves.

The pensions minister Torsten Bell has promised that there will be no change to auto-enrolment rates until at least 2029. The government has been lobbied by the pension industry to set the minimum contribution at 12 per cent. The industry body Pensions UK, formerly the Pension and Lifetime Savings Association, has suggested that this should happen by the early 2030s and that the contributions should be evenly split between employers and employees.

• Rachel Reeves poised to force firms to pay more into staff pensions

This would match the minimum rate in Australia, which has already inspired Reeves’s pension policy. Earlier this year she unveiled plans to create Australian-style pension megafunds by merging 86 local government pension schemes into six.

In Australia employers pay the whole 12 per cent minimum contribution, and experts suggest that businesses here could also cover the majority of any increases to auto-enrolment rates.

Karen Tasker from the accountancy firm RSM UK said: “I think the plan will be for the increase to be funded by the employer. Some in the pensions sector are calling for employers to pay 7 per cent, and the employee the rest. Pensions UK has suggested an equal split.”

For employers, doubling the pension contribution rate makes only a small difference to the cost of employing someone. For someone earning £37,000, the 3 per cent rate costs employers £1,110 a year, compared with £2,220 if they contributed 6 per cent. This is equivalent to spending 2.5 per cent of the total cost of an employee salary on pension contributions, versus 5 per cent.

But it comes on top of higher taxes for businesses — employer national insurance contributions rose from 13.8 per cent to 15 per cent in April — and higher salary costs thanks to an increase to the minimum wage.

Less take-home pay

Higher costs for employers could ultimately be borne by employees in the form of lower pay and less generous bonuses. Matthew Percival from the Confederation of British Industry said: “If you look at what happened when auto-enrolment was introduced, the share of money spent on employing people stayed the same, but less of it ended up in people’s wages because more of it ended up in pensions and other benefits.”

A survey of more than 900 firms by the Federation of Small Businesses, a trade body, found that 29 per cent would reduce bonuses or overtime if minimum pension contributions increased to 6 per cent.

An alternative could be to split the contributions more evenly and also increase the minimum amount saved by employees. But anything that reduces disposable income would be unpopular for hard-up workers.

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Jonathan Cribb from the IFS said: “We think you can target middle and higher earners with higher contribution rates, and this will ensure people are saving more when it is easier to do so, rather than when they are on really low earnings and struggling.”

For someone earning the average salary of about £37,000 at age 25, putting 12 per cent of their salary away every year in a pension could give them £1.1 million on retirement. This assumes they maintained that salary and that their pot grew at the average rate of 7 per cent a year. If they had made pension contributions of 8 per cent, they would have £733,000 in their pot at 67 — £367,000 less.