With the state pension age set to increase next year, the government will be making substantial savings, estimated around £6billion a year. The Institute for Fiscal Studies and Financial Fairness Trust revealed a new report as part of The Pensions Review that this move will also disproportionately affect low-income people but could also go a long way in helping them by using just a fraction of this sum.
The report highlighted two different methods that could provide much-needed relief to low-income people starting retirement. It also noted: “The public finance cost of each of these targeted measures would be a fraction of the savings to the exchequer from increasing the state pension age.”
People below state pension age could get extra state support through additional Universal Credit for the final year they can claim this benefit, the first approach recommended, as it usually stops once they hit state pension age. A potential increase of 70% of standard allowance on UC could reduce the relative income poverty rate by around 5% in the affected age group, the report claimed.
About 30,000 of the lowest income households could benefit from this measure. It would also cost roughly £600million according to the expert’s analysis, or just a tenth of what the exchequer will be saving by upping the state pension age.
The second method would target Universal Credit recipients in the same way a year before they reach state pension age but only if they also claim health-related benefits. This support would cost even less, roughly £200million a year, but also drastically reduce the amount of people assisted.
Instead of 30,000, only 3,000 households in this age group would be wrenched out of poverty. However, the report warned of a potential issue with both methods claiming it could reduce the motivation for people on Universal Credit to get work or increase the incentive for people to claim health benefits.
Heidi Karjalainen, a Senior Research Economist at IFS and an author of the report, highlighted that the state pension age increase cannot be avoided in order to keep the benefit sustainable, but added: “Failing to support the most harmed groups risks undermining public confidence in the system and, in particular, the desirability of increases in the state pension age. There is a good case for using some of the savings resulting from a higher state pension age for targeted enhancements to working-age benefits for the most adversely affected groups in the run-up to state pension age.”
Looking at retirement poverty from a different perspective, the IFS also highlighted that people who rent their accommodation privately in their retirement have the highest poverty rates among pensioners. They are also the most at risk of falling into poverty in retirement even if they’re receiving the full new state pension at £221.20 a week.
Mubin Haq, CEO of abrdn Financial Fairness Trust, noted: “Levels of poverty amongst private renter pensioners are three times the rate amongst owner-occupiers, with the number living in the private rented sector set to rise significantly. Hardship is also high amongst social renters; however, the situation for private renter pensioners is particularly worrying.
“Not only are rents higher, and there is less security of tenure, but state support with housing costs for those on low incomes often fails to meet actual costs or needs and it doesn’t tackle the low availability of one-bedroom properties.” The report recommended a change to pensioner housing benefit, allowing single and couple pensioners to have an additional bedroom in their home and still be covered by their maximum benefit rates.
The reasoning noted retirees spend most of their time at home and may find the extra room is “appropriate” or to allow children or grandchildren to stay with them. This move would be costly at around £150million a year to begin with and only increase from there.
However, it could “provide immediate support” and still at a fraction of the cost the Government is saving with the state pension age increase. Haq added: “Increasing housing benefit to allow for a second bedroom would better meet the real cost of private renting and provide much-needed space for carers and family to support older people with their increasing health needs.”