Policymakers should consider further raising the age at which private pensions can be accessed in order to boost the UK’s workforce, according to a think-tank report.
In a report published today (February 21), the Resolution Foundation said a rise in economic inactivity means that the UK employment rate remains one percentage point lower than pre-pandemic.
Pre-pandemic the employment rate for 16 to 64-year-olds ws 76.6 per cent in December to February 2020 and it is now 75.6 per cent in the final three months of 2022.
The report, called Post-pandemic participation, explored labour force participation in the UK, from the Covid-19 pandemic to the decade ahead.
It set out a series of measures aimed at tackling the post-Covid rise, arguing that one way to do this would be by increasing the age at which someone can access tax-relieved private pension wealth - otherwise known as the ‘normal minimum pension age’.
Currently, this is 55 and it is set to rise to 57 from 2028, which mean it remains 10 years below the state pension age.
However, the think tank said this supports early retirement, particularly for wealthier individuals, and argued that policymakers should consider further raising this age, or at least slowing the rate at which money can be withdrawn before reaching state pension age.
It said: “Many early retirees finance the first few years of retirement by taking a tax-free lump sum of up to 25 per cent of their pension pot.
“This amount is uncapped, meaning it is highly regressive with some wealthy individuals receiving tax-free lump sums running into hundreds of thousands of pounds.
“This is hard to justify, and so we recommend that policymakers consider capping these tax-free lump sums.”
Alongside this, the think tank also said that there remains some defined benefit (DB) pension schemes in which people’s pensions are affected if they re-enter employment after a period of retirement.
'Knee-jerk' reaction
Former pensions minister and LCP partner Steve Webb has warned against tweaking the pension system as a "knee-jerk" reaction to a reduction in economic activity amongst older workers.
Webb said: “Whilst the desire to make later life work more rewarding is laudable, this should not be at the expense of yet more incremental tinkering with the pension system. In particular, the idea of hiking the minimum age at which people can access their pensions would be a backward step.
"The existing plan to raise the age to 57 is already adding to the complexity of the system and further increases would add more complexity with no obvious benefit.
"There are some people who have retired early during the pandemic but this will often be combined with a secure final salary pension and changing pension rules for DC schemes will not affect this group."
Likewise, Tom Selby, head of retirement policy at AJ Bell, said capping pension tax-free cash is all-too-often pushed as a solution to problems facing government.
He added: "If pension tax-free cash were to be further restricted – it is of course already limited by the lifetime allowance – serious consideration would need to be given to managing the transition from the current system to a reformed system.
