The state pension age should increase but come with a guaranteed payout to cushion the blow, a former Treasury minister has said

The Government should pay those who reach the state pension age for five years even if they die, the ex-minister behind the triple lock has suggested.

Sir Steve Webb, a former pensions minister, said in a report that the state pension age should increase but there should be a “minimum guaranteed payout” of five years to protect people with shorter life expectancies.

He has proposed that the heirs of those who die within five years of becoming eligible for the pension would receive this payout.

Webb, now a partner at pensions consultancy LCP, argued in the report that people should get the state pension for an average of 20 years, with the pension age rising by one year every 10 years to keep up with growing life expectancies.

Webb said there would probably need to be a similar guaranteed payout for people who have paid into the system but die before they reach the state pension age. This could be delivered through the working-age bereavement benefits system.

The length of retirements are a historical anomaly due to a failure in the 20th century to adjust pension ages to reflect massive improvements in life expectancy, LCP’s report said.

Webb said there is a strong case for raising the state pension age, but it has always been hard to do so in a way that is fair to people in deprived areas who have lower life expectancies.

He said: “Our proposal for a guaranteed minimum payout period of five years represents a ‘something for something’ reform.

“Those who have paid in to the system all of their lives would be guaranteed that they or their heirs would get a minimum payout once they start drawing a pension. This would be a concrete way of addressing concerns over unfairness each time state pension ages are increased.”

The cost of the state pension has risen steadily over the past eight decades, from around 2 per cent of the UK economy to 5 per cent, and is forecast to reach 7.7 per cent by the early 2070s, according to the Office for Budget Responsibility.

Spending on the state pension has steadily risen because of a growing number of people above the state pension age as well as the triple lock policy, which ensures the state pension rises by the highest rate of inflation, earnings growth or 2.5 per cent each year, the fiscal watchdog said in July.

LCP’s proposal for a minimum guaranteed payout is modelled from the annuity market. People who buy annuities exchange a lump sum for a guaranteed retirement income, which can sometimes be passed on to a surviving loved one if the purchaser dies.

Because most people live for five years after reaching the state pension age, the cost of implementing the guarantee would be modest, LCP said.

LCP said its ideas have been fed into the Government’s review of the state pension age.

Over the course of the 20th Century, life expectancy for young adults rose by 17 years, but the state pension age did not rise at all.

The women’s pension age rose from 60 to 65 between 2010 and 2018, and reached 66 for both men and women in 2020 – but retirement lengths have already started growing again.

Life expectancy is 79 years for men and 83 years for women, according to the most recent data from the Office for National Statistics.

But most people who reach 66, go on to live for another 18 to 21 years.

The Government has said it aimed to set the state pension age so that people could expect to spend about a third of their adult lives in retirement, but LCP’s paper found this would be unsustainable.

The analysis comes as the Chancellor, Rachel Reeves, comes under increasing pressure to plug a hole in the UK’s finances in this month’s Budget.