Increasing the state pension age from 65 to 66 between 2018 and 2020 caused income poverty among 65-year-olds to more than double, new IFS research reveals.
Absolute income poverty rates (after accounting for housing costs) among 65-year-olds increased from around 10% to 24% as a result of the state pension age rise.
The main impact of the state pension increase was, unsurprisingly, the loss of state pension income worth around £142 per week on average in 2020/21.
While some responded to the increase in state pension age by working longer, others were unable to do this. Anyone building a retirement plan today needs to factor in the potential for less income to be provided by the state in the future.
Tom Selby, head of retirement policy at AJ Bell, comments: “For those on very low incomes, increasing the state pension age by just a year can be enough to push people serious financial turmoil.
“And while there are ways to replace at least part of this lost income – either via in-work benefits, from your private pension pot or by working longer – the evidence suggests lots of people are either unable or unwilling to go down this road.
“As a result, millions of people saw their state pension income plummet by £142 per week on average, or over £7,000 during the year. Even taking into account increases in private income, on average net income plummeted by £108 per week.
“For anyone already struggling to make ends meet, missing out on thousands of pounds in pension income will inevitably force them into making painful budgeting choices in order to survive.”
“People who have yet to reach state pension age – and particularly younger generations in their 20s, 30s and 40s – need to prepare for the possibility that the state pension age will continue to be pushed back.
“Rising average life expectancy and ballooning state pension costs mean the state pension age is already scheduled to increase to 67 by 2028 and 68 by 2046. Indeed, a previous review recommended accelerating the rise to 68 by 7 years – although this has not yet been written into legislation.
“While there has been some evidence of a slowdown in the expected growth in life expectancy – particularly in deprived parts of the country – future generations still need to prepare for a world where the state provides less in retirement.
“That means coming up with a sensible retirement savings plan and contributing as much as you can afford to a pension, as early as you can.
“For most people, pension saving will need to be balanced against other priorities like saving for a home, holidays or day-to-day spending. But it is vital it is part of your thinking when setting out your monthly budget.
“The general rule for pension saving is the earlier you start, the easier it is over the long-run, with your fund having more time to benefit from the upfront boost provided by pension tax relief, matched employer workplace contributions and long-term tax-free investment growth.
“If you don’t take responsibility for your retirement then you risk being left reliant on the moving target of the state pension.”