In his November Autumn Statement, chancellor Jeremy Hunt noted with concern the increase of 630,000 people of working age who are ‘economically inactive’ compared with the figure pre-pandemic.
Although many countries saw a rise in economic inactivity during the Covid-19 pandemic, the figure in the UK has remained stubbornly high.
As a result, we can expect to see a range of measures in the March Budget to address the issue, including some which relate to pensions.
Some have called for new restrictions on pension freedoms in order to stem the flow of early retirement
It is worth saying that ‘early retirement’ is only a very small part of the overall explanation for rising inactivity. Nearly half of the 630,000 increase is among those aged under 50.
Furthermore, the largest single group to have grown is not the retired but the ‘long-term sick’, indicating factors such as the pressure on the NHS could be part of the story.
However, it is true there has been a modest rise in those aged 50-64 who classify themselves as ‘retired’. The government is keen to tempt some of these back into the labour market as well as to discourage others currently in work from joining their ranks.
One theory is that early retirement is happening partly because of pension freedoms. Indeed, some newspapers have called for new restrictions on the freedoms in order to stem this flow.
The government thinks some have failed to understand how quickly their pension pot will run down
The argument is that the ability to tap into defined contribution (DC) pensions freely from the age of 55 is helping some to fund an early retirement to the detriment of the wider economy.
The government thinks some of the people who have done this have failed to understand how quickly their pension pot will run down. It is not clear yet if it will go as far as limiting pension freedoms but there are growing rumours it might make ‘mid-life MOTs’ mandatory, perhaps placing a legal duty on insurers to offer them to certain DC savers.
The hope is that a more realistic understanding of how long pension funds may last will discourage people from retiring prematurely (and cause those who have retired to rethink their plans).
While it is no substitute for personalised financial advice, the basic concept of a mid-life review, covering finances, health and career choices, is a good one, giving people time to make a meaningful change to their work and finances in later life.
Reforms should be years in the planning and based on thorough research. But the government is in a hurry
Details of the mid-life MOT are on the gov.uk website, which includes toolkits for employers who may wish to offer them. The self-employed can book a free ‘MOT’ which will be provided by MoneyHelper, the latest brand of the Money and Pensions Service.
It would, however, be a big step if providers were required by law to offer MOTs. One problem is that, if the MOT is offered via insurance companies and pension schemes rather than employers, take up could be low, especially among those who had already taken the decision to retire early.
Another idea being trailed for the Budget is giving the over 50s an income tax exemption of six or 12 months if they go back to work after long-term sickness absence.
They might also be allowed to ‘run on’ their sickness benefits alongside the early months of work so that, if employment did not work out, they would not have to start a benefit claim from scratch.
Reforms to improve the labour market for older workers should be years in the planning and based on thorough research. But the government is in a hurry.
A review announced in November will be published early in 2023, with policy measures announced in March and potentially implemented in April.
This is a government which is running out of time before the next election and is looking for a ‘silver bullet’ to tackle economic inactivity.
Whether the measures being trailed so far will do the job seems pretty unlikely.
Steve Webb is a partner at consultants LCP and was pensions minister 2010-15
Shouldn’t that read ‘the measures being trialled so far’?
At 61 I want to get back to work. It’s employers who seem less keen on my age
It’s likely those en trapped by previous pension ministers!! in their employers Auto enrollment schemes, if with Scottish Widows, as many are, they will have to return to work, as the Fact Sheet on Trustnet today gives a 1y & -27% 3y & -30.5% and a 5y -18.5% Sedol No 3337608, Fund £1,102.9m . All those un-advised people, Mr Webb you should be ashamed.