Why the State Pension age increase is set to hit low earners the hardest

The State Pension age in the UK is rising. Sean LaPointe takes a look at why low earners in the UK could be affected the most by State Pension rises.

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Low earners in the UK are likely to bear the brunt of the effects of the rising State Pension age. This is according to a new study by the Institute for Fiscal Studies (IFS), which says that low earners will be more likely to be forced to work for longer when the State Pension age rises. Here is the lowdown.


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What is the current State Pension age?

The State Pension age rose to 66 for both men and women in 2020. Two further increases are currently set out in legislation. The first one, which will see the State Pension age rise to 67, is scheduled for between 2026 and 2028. The second increase, which will see the State Pension age rise to 68, is slated for between 2044 and 2046.

That being said, a review of the State Pension age is currently underway. One of the review’s main agenda items is whether to move the proposed State Pension age increase to 68 from 2044/2046 to 2037/2039.

What’s the effect of the State Pension age increase?

According to the IFS, the increase in the State Pension age between 2018 and 2020 resulted in a 55,000 increase in the number of 65-year-olds working. It also led to a 1.8 million increase in the number of work hours per week for this group.

However, the effects were unequal. In the most economically deprived areas, the IFS reports that the employment rate for women aged 65 rose by 13% and for men by 10%. In contrast, female and male employment rates increased by only 4% and 5%, respectively, in the most prosperous areas.

The disparity in employment rates suggests that people who live in poorer areas and thus earn less have a greater need for income at older ages than those who live in affluent areas.

As Jonathan Cribb, an Associate Director at IFS, said, “The sharp increases in employment have come in particular from those in poorer areas, and for those who have lower levels of education, suggesting that without a State Pension they cannot afford to retire.”

What are pensioners doing to cope?

Many are having to work for longer. According to Emily Andrews, deputy director for evidence at the Centre for Ageing Better, “A significant proportion of workers are staying in work for an extra year at 65, until reaching the new State Pension age of 66.” 

She adds that though these people “will be financially better off as a result,” working longer isn’t an option for everyone. For example, there are those who can’t work beyond 65 because of ill health.

For these people, the increase in State Pension age will mean going an extra year without the financial benefits of a salary or the State Pension.


What can future pensioners do to avoid this situation?

Advocates have called on the government to help people who may be without work in their 60s to get back to work and to provide some financial assistance to people for whom working past 65 is not an option.

However, more is required to ensure that future generations don’t face the same predicament. One expert has called for the lowering of the £10,000 earnings threshold for auto-enrolment. This could allow younger workers to join a workplace pension sooner and thus be able to save for their future from the very first pound they earn.

It remains to be seen whether the government will listen to such pleas.

So, what proactive steps can current employees take to safeguard their retirement amid rises in State Pension age?

If you are currently enrolled in a pension plan, see if it’s possible to increase your contributions. Apart from the resultant tax relief, it is possible that your employer will increase its contribution too. This could result in a larger pension pot in your later years.

If you have other investments or savings outside your pension, check whether you’re getting the best possible returns from them. For example, do you currently have money in a low-interest savings account? See whether you can put some of it in an account with a higher potential for returns, such as a stocks and shares ISA.

These steps could help you fill any gaps or shortfalls in your overall pension pot caused by State Pension age increases.

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