The history of the State Pension

The State Pension provides a solid building block of income in retirement, and many people are completely or partially dependent on it. According to the Office of National Statistics, 1.2 million retired households are “mainly reliant”. This means the State Pension or pension credit provides at least three quarters of total income.

Yet there is a lot of confusion around how the State Pension works, often because there are essentially two versions, the old state pension and the new. We previously explored how you qualify for the new state pension, but there is a wide range in the amount people receive from both this and the previous system prior to a state retirement age of April 2016.

With Labour committing to the triple lock – the increase in the state pension each year of the higher of inflation, wage growth or 2.5% – we do not expect much change to the state pension in the short term. However, the government has also promised to conduct a wide pension and retirement review as part of this Parliament, so future alterations cannot be ruled out.

To provide some context here’s a look at how the state pension originated and evolved over the years.

The history of the State Pension

• Pre-20^th Century

Prior to the 20th century, state support for old age was limited. ‘Poor Laws’ dating back to the mid-14th century, compelled parishes to care for the needy, including the elderly, and these were gradually superseded by welfare reforms alongside family societies, guilds, and trade unions.

There were some special provisions set up in the military, for instance a pension fund for disabled Royal Navy seamen from 1590. State pensions in a loose sense started appearing in earnest in the 19th Century. However, they were still for certain individuals or narrow groups such as royal favourites, civil servants, clergymen or injured soldiers or sailors.

• 1900 - 1942

The modern state pension began with the introduction of the Old Age Pension in 1909. It was paid from 70, a ripe old age at the time. It required no contributions or work record, although a recipient had to have lived in the UK for 20 years and be of ‘good character’. In addition, it was means tested. To qualify for the full amount, you needed to have an annual income of £21 or less. Those earning between £21 and £31 got a reduced payment on a sliding scale.

The first contributory state pension emerged with the Widows, Orphans and Old Age Contributory Pensions Act 1925. Both employer and employees were required to pay into to the scheme, and it was broader, payable to individuals whose income was below £250 per annum. However, it was only compulsory for low-wage workers. It was more generous, worth twice as much as the Old Age Pension and paid from the lower age of 65.

• 1942 - 1980

In 1942 the Beveridge Report – Social Insurance and Allied Services – proposed a universal state pension to provide a safety net against poverty in old age. Subsequently, The National Insurance Act 1946 introduced the Basic State Pension, with effect from 1948. It was funded by National Insurance contributions paid by all workers, although initially married women were excluded. The State Pension Age was 60 years for women and 65 years for men.

Acknowledging the subsistence level of the Basic State Pension, an additional Graduated Pension Scheme was added in 1961 based on earnings. This was later replaced with SERPS (State Earnings Related Pension Scheme) from 1978 for employees based on a ‘middle-band’ of earnings. Individuals with an occupational pension scheme were able to ‘contract out’ of SERPS and reduce the rate of their national insurance contributions.

• 1980 - today

The 1980 Social Security Act removed the link between the average worker’s earnings and the pension paid.

The 1995 Pensions Act outlined a plan to phase in a higher pension age for women to 65 from 60 between April 2010 and April 2020, so that it was equalised with men. The 2011 Pensions Act accelerated this to completion by November 2018 and provided for the gradual increase to the state pension age for both men and women to increase to 66 years.

SERPS was replaced by The State Second Pension (S2P) in 2002 with the aim of providing additional pension benefits to lower earners and to include certain carers and those with long-term illness or disability.

In 2011, the Conservative and Liberal Democrat coalition government introduced the ‘triple lock’, the commitment whereby the state pension is uprated in line with inflation, wage growth or 2.5% – whichever the highest.

A major overhaul took place in 2016 when the New State Pension replaced the combined Basic State Pension plus additional pension (S2P).

What is the future of the State Pension?

With a commitment to the triple lock still in place, the State Pension looks set to increase in line with or slightly ahead of inflation. At least in the short term. However, a new threat for many pensioners comes from tax. Pensioners with a full New State Pension face being taxed on some of this income for the first time, while others with larger amounts from the old system already are.

The income tax personal allowance is presently frozen at £12,570 and the full New State Pension for 2024/25 tax year is £11,502. However, under the terms of the triple lock the State pension should uprate by a healthy amount next April in line with wage growth, the latest figure being 5.7%. This would take the state pension to over £12,100 assuming no change from the most recent March to May reading.

From that point it would only take a couple more years to exceed the personal allowance, meaning a so-called ‘retirement tax’ on the state pension could occur from the 2027/28 tax year. The government will need to address this at some point as it probably isn’t feasible to drag lots of low-income pensioners into declaring and paying tax. Having committed to the triple lock, one option would be to increase the income tax personal allowance.

The State Pension remains an important foundation to people’s retirement income, so it’s important to understand how entitlement works as part of your planning. For those without a full national insurance contribution record it is often possible to pay to fill gaps, which can represent an excellent return on the cost.

How do I check my State Pension entitlement?