Pensions - early access
Looks at the impact of the COVID-19 outbreak on the employment rates and retirement plans of older people and the impact on their future retirement incomes
The COVID-19 pandemic has affected the unemployment and labour market inactivity rates of older workers:
- Office for National Statistics (ONS) figures show that unemployment among people aged 50+ increased from 274,000 in April-June 2020, to 412,000 in September-November. This was an increase of 50%, compared to 25% for all aged 16 and over.
- The number of people aged 55 and over, claiming unemployment benefits increased from 198,945 in March 2020, to 394,975 in December 2020. This was an increase of 99%, compared to an increase of 106% for all people aged 16 and over.
- In the quarter following the start of the pandemic (April to June 2020), almost 150,000 workers age 65+ left employment, with a big rise in inactivity. Since then, there has been an increase in employment for these older workers, although in the most recent quarter (September to November) there were still 72,000 fewer in employment than in January to March 2020.
Research suggests the COVID-19 outbreak has had an impact on retirement, leading some to bring forward their retirement plans and others to delay them (for example, to recover lost savings or support adult children or other family members financially). Research by the Institute for Fiscal Studies published in October 2020 on the coronavirus pandemic and older workers found that some five per cent expected to retire earlier than they had planned while eight per cent of older workers put back their retirement plans.
Research by the same authors found that the financial consequences of the coronavirus pandemic for older people (aged 52 and over) had led five per cent to draw on their pension savings. Other options chosen had been to reduce spending (one-third), reduce savings (20%), draw on savings (20%), borrow from a bank (three per cent) or borrow from family or friends (three per cent).
Defined contribution pension schemesIndividuals can usually start to draw an income from workplace or personal pension savings from age 55 (Gov.UK, Early retirement, your pension and benefits). An offer to help release cash before this age can be a warning sign of a scam. Following the introduction of the pension freedoms in April 2015, individuals with defined contribution (DC) pension savings aged 55 and over, now have flexible options for drawing on them, including taking an adjustable income or withdrawing cash in chunks. The implications of early access need careful consideration: including regarding tax, social security benefits and debts, ongoing pension contributions and future retirement income (see Pension Wise, Tax and getting advice, Low Income Tax Reform Group, Coronavirus: taking money from your pension).
HMRC figures for the last three months of 2020 show a six per cent year-on-year increase in the amount withdrawn from pensions flexibly (£2.4 bn, up from £2.2 bn in the same months in 2019) and in the number of individuals making those withdrawals (360,000, up from 327,000). The average amount withdrawn per individual was three per cent lower (£6,600, down from £6,800).
There have been calls to widen the circumstances in which people aged under 55 can access pension savings. The Government has said it does not intend to make this change on grounds that tax relief is provided to encourage people to save for an income in retirement (PQ 40658 5 May 2020). In Australia, where the Government decided to allow temporary early access as part of its economic response to COVID-9, there have been concerns about the impact on future retirement incomes (Industry Super Australia, Super wipe-out, 2 July 2020; A quarter million NSW workers have wiped out their super savings, January 2021).
Defined benefit pension schemesThere is concern that redundancies may lead to an increase in transfers out of defined benefit (DB) pension schemes that may not be in individuals’ best interests.
The Financial Conduct Authority (FCA) continues to believe that, “for the majority of people it is not in their interest to transfer out of a DB pension.” Where an individual seeks advice to transfer it is important that advice given is suitable and appropriate for their needs and situation. In January 2021, it said there were “some signs of improvement in the DB transfer advice market” (FCA, January 2021). To put this in context, in June 2020, the FCA said that “the proportion of customers who have been advised to transfer out of their DB pension is unacceptably high” and that it was “still finding too many cases in which transfers were not in the customer’s best interests” (FCA sets out next steps to improve the DB pension transfer market, June 2020).
On 28 October 2020, the Pensions Regulator, Money and Pensions Service and the FCA issued a joint statement on the Rolls Royce DB scheme, where there had been an increase in transfer requests following the announcement of redundancies at the company. The FCA issued a data request to financial advisers involved and said it would take action where it saw unsuitable advice or bad practice.
In November 2020, the FCA issued a wider data request to firms advising on DB transfers, covering the period of the COVID-19 outbreak, findings from which have not yet been announced (data published in January 2021 relates to the period October 2018 to March 2020). For more on the background, see Commons Library Briefing Papers, Pension transfer advice, CBP 8848 (June 2020); Pension freedoms: transfers from defined benefit schemes, CBP 8382 (May 2020).
State PensionsIn the UK, there have also been calls to allow certain groups early access to the State Pension. For example, Age UK called for early access to the State Pension for those within three years of their State Pension age (SPA) who are unlikely to be able to work again due to caring responsibilities, a disability, or long-term joblessness.
The arguments around early access were considered by John Cridland in his 2017 review of the State Pension age. He concluded that a universal State Pension has the merit of “simplicity and clarity, and provides an important trigger moment for planning purposes” and that “targeting help on the most disadvantaged, can be tackled with support in the benefit system.” (Final Report, March 2017, section 4.1). This conclusion was endorsed by the Government, which emphasised the advantages of a universal State Pension age, in creating a “simple system around which people can plan.” (DWP, State Pension age review, July 2017, chapter 3). The Government has continued to resist calls for early access to the State Pension (PQ 39620 4 May 2020).