State pension age rises hurt this group the most – should we be working longer?

Women in their late 50s that are out of employment have been hardest-hit by state pension age increases, a new study has found, as the government reviews whether it should rise faster.

The state pension age is currently 66 for men and women. It is due to rise to 67 between 2026 and 2027, and to 68 in 2044 to 2046. But the effects of previous state pension age increases have not been felt equally, according to research by the Institute of Fiscal Studies (IFS).

Women already out of employment in their late 50s have been particularly hard-hit by the rise in state pension age from 60 to 66 that occurred between 2010 and 2020, it found, because of the impact of how much state pension they will get.

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On average these women experience a bigger drop in income as a result of state pension age increases. They are also more likely to have a low income, to be in poor health or to have a disability.

Impact on women of state pension age rise

A key reason state pension age increases have particularly hit the incomes of women already out of employment in their late 50s was that very few re-entered paid work in response to the reform, IFS’s research found.

In contrast, for those who were in paid work in their late 50s, their employment rate at ages 60 to 64 jumped by 16 percentage points, as significant numbers delayed their retirement.

This means falls in average income at ages 60 to 64 as a result of the increase in the state pension age were larger (a fall of £81 per week) for women who were out of employment in their late 50s than for those who were still in paid work in their late 50s (a fall of £42 per week).

Consequently the likelihood of participating in social activities – such as visiting museums or theatres, or being part of a sports or social club – fell by 8 percentage points (from a baseline of 53% pre-reform) among all women affected by the rises in the state pension age.

While state pension age rises led to a big boost in employment, they also pushed more people into income poverty, the IFS pointed out.

Heidi Karjalainen, senior research economist at IFS and an author of the report, said: “These findings do not mean that the state pension age should not continue to rise. Instead, they highlight the importance of enhanced support for those most harmed by increasing the state pension age.”

Karjalainen continued: “In general, helping people remain in, or return to, paid work at older ages, while providing additional targeted financial support for those who cannot, can also help maintain public support for future increases.”

These issues need to be carefully considered by the third review of the state pension age, which the government launched in August, she added.

Could the state pension age rise to 70?

The government’s review of the state pension age will explore whether it should automatically increase in line with rising life expectancy, potentially pushing the state pension age up to 70.

It will look at the "merits" of implementing automatic adjustments to strengthen government finances, as well as assessing how the state pension age can manage “the long-term sustainability of the state pension”.

The full new state pension looks set to increase by just over £560 a year next April, an inflation-beating rise that raises more questions about its affordability for the government – while it ushers in a new era where pensioners relying solely on the state pension will pay income tax for the first time from 2027.

The state pension age review will examine the experience of other countries that already automatically link payments to life expectancy, including Denmark, which recently raised its retirement age to 70, which will kick in by 2040.

Denmark has tied the official retirement age to life expectancy since 2006 and is one of nine OECD countries to do so.

There is no official retirement age in the UK – people can usually continue working for as long as they wish – but many people retire once they reach state pension age or before.

Delaying retirement – working longer

Raising the state pension age will encourage – or force – many people who can not afford to retire without the state pension income to work longer.

Catherine Foot, director of the Standard Life Centre for the Future of Retirement, commenting on the IFS’s report, said ensuring that people nearing state retirement age can remain in work “is essential to many people’s retirement incomes as well as the country’s economic growth prospects”.

“A combination of longer lives, rising cost pressures and economic uncertainty mean it’s never been more important to ensure workers don’t fall out of employment before they reach state pension age. One quarter of all 60 to 65-year-olds live in poverty and good quality, satisfying employment can help build financial resilience for later life,” she said.

The government’s growth agenda also relies on retaining older workers, she pointed out.

Over 50s leaving the workforce has a major impact on the output of the Industrial Strategy sectors, and an estimated £31 billion of output is lost each year from individuals retiring early by leaving before state pension age.