Andrew Megson from My Pension Expert discusses the various policy options the Government is considering to encourage potential workers out of economic inactivity.
The UK’s shrinking workforce has presented somewhat of a conundrum for economists. With the cost-of-living crisis causing financial strains for millions, one would be forgiven for thinking that more would be seeking employment.
Yet, recent figures from the House of Lords Economic Affairs Committee show that the number of individuals considered to be economically inactive has increased by 565,000 since the onset of the Covid-19 pandemic.
Reasons for the shrinking workforce included a rise in long-term sickness and disability among those of working age, and a reduction of EU workers since Brexit. However, people simply taking earlier retirement is also chief among the contributing factors. Indeed, many saw the onset of the pandemic as a logical time to step away from the world of work, or perhaps move into part-time roles.
A shortage of labour presents an economic headache. According to CBI, three-quarters of UK companies are impacted by labour shortages. Meanwhile, KPMG predicts that the economy will shrink by 1.3% this year as high inflation and rising interest rates continue to slow growth.
At a time when the country can ill afford any further economic losses, it is unsurprising that the government is keen to keep over-50s in work or coax them back into employment. However, achieving this must involve the right support and incentives, while enabling over-50s to weigh up their options.
We must start by acknowledging that it is, of course, every individual’s right to choose when they want to retire. No one can or should be forced to work if they do not want to, particularly if they have already worked and saved for decades to enjoy their retirement.
As such, politicians believe that significant policy manoeuvres to persuade people in their 50s and 60s to remain in the workforce for longer. And this can be observed in recent reports of MPs calling on the Government to change pension lifetime allowance rules is a good place to start.
The current lifetime allowance is frozen at £1,073,100. If their pension savings exceed this limit, pensioners are typically taxed 55% on the excess of any lump sum payments, or 25% if they withdraw any other way. Consequently, this can act as a disincentive to carry on working once individuals reach the cap on their tax-free pension. Due to rising wages, many savers are reaching their lifetime allowance well ahead of the planned retirement. Therefore, higher earners are
discouraged from prolonging their careers.
It should also be noted that those worried that they will exceed the lifetime allowance should talk to an independent financial adviser (IFA). An adviser can discuss how their retirement strategy can be tweaked so they can remain on track to their strongest retirement outcome.
The aforementioned MPs believe that lifting the cap could encourage people to work longer and continue to save even more into their pension, without being hit with a hefty tax bill. However, the effect that changes to the lifetime allowance, should they be introduced, will only go so far. This is because it only incentives the highest earners. There is still no adequate plan to address the issues around the thousands of people feeling pressured to return to the workforce because they have not saved adequately for retirement.
In this current climate, people’s retirement plans must remain flexible. And for some, this might mean returning to work in order to top up their income for a period of time. Indeed, research from My Pension Expert in 2022 found that 7% of UK adults aged 40 and above had come out of retirement in 2022 to re-enter the workforce due to inflationary pressures.
Reports that the government is set to launch an initiative offering over-50s who left work during the pandemic a “midlife MOT” may provide some support for those who are ‘unretiring’. The MOT will aim to help them take stock of their finances, skills and health, and enable them to better prepare for their retirement and build financial resilience.
However, career-building and financial guidance should not be the only point of reference for retirees before re-entering the workforce. It is crucial that the government also works toward improving access to advice, encouraging Britons to seek affordable, independent advice before making any decisions. An adviser will assess an individual’s financial situation and offer the best, personalised advice to assist them reach their retirement goals without negatively impacting their current circumstances.
This could involve gradually winding down working life and moving to part-time employment for a few years. Conversely, the right option may be financial options such as placing more money in alternative investments or moving savings to a flexible-access drawdown. An advisor can guide savers through the options depending on their unique circumstances as well as helping them understand the relative risks of each approach.
If the government hopes to bring over-50s back into the workforce, then incentives such as increasing LTA and financial reviews are a good start. However, no should feel the need to return to the work because they feel pressured to do so. Instead, people should be entitled to first weigh up all options with an affordable regulated financial adviser and discuss whether ‘unretirement’ is the right move for them. Doing so, will allow all Britons to achieve the comfortable retirement they deserve, whether that’s now or after a few more years of working life.
*Andrew Megson is the executive chairman of retirement income specialist My Pension Expert. Founded in 2010, My Pension Expert specialises in providing independent advice to UK consumers about their pension plans – it arranges millions of pounds worth of retirement income options each week. The company is entered on the FCA Register № 579999.