State Pension  

UK pensioners face sharpest income drop in retirement

UK pensioners face sharpest income drop in retirement

UK pensioners are falling below the poverty line due to the low levels of state pension, a report has claimed.

The Organisation for Economic Co-operation and Development (OECD), which published a report on the pension systems of its member countries, said old age poverty in the UK was high and had to be prevented from increasing.

It blamed a low level of state pension, particularly under the old system, for the prevailing poverty rate among the over 75, which, it said, stood at 18.5 per cent, with women being disproportionately affected.

The report said the introduction of the new single-tier pension – 30 per cent higher than the old state pension – could improve the situation but cautioned there was a long transition period meaning current retirees would not see a difference.

The problem of inequality was exacerbated by the fact that people who had good incomes during their working lives, own homes, and have private pensions had relatively good incomes, while others without additional sources of revenue were left with few resources, it said.

The report warned: “Following the sharp rise of income disparities during the 1980s in the UK, inequalities in later life will rise further as generation X approaches retirement.”

The OECD said labour market outcomes will be decisive. 

While employment rates among the higher educated are relatively high (about 75 per cent of highly-educated and 72 per cent of medium-educated men in the age group 55 to 64 work), they are low among the lower educated (56 per cent are in work).

Lower educated workers are also less likely to contribute towards personal or private pensions putting retirement income adequacy at risk, the OECD said.

It also found a large share of older people in the UK were in bad health with disabilities and obesity being a particular problem.

Currently 20 per cent of the over-80s are classified as obese in England, and there is a risk that this proportion could increase, the OECD report stated.

Between 1990 and 2015 the level of obesity in adults in the UK almost doubled from 14 per cent to 27 per cent, the OECD reported.

With bad health being a major contributor to labour market exit, contributions towards pensions may decline in the future, the OECD warned. 

However, the OECD endorsed the introduction of auto-enrolment, which it said had reversed the downward trend of workplace pension participation from 42 per cent in 2012 to 70 per cent in 2015, having previously fallen from 51 per cent in 2005.

Nevertheless, planned contribution increases, rising to 5 per cent (3 per cent for employees) in 2018 and 8 per cent (5 per cent employee) in the year after could encourage lower earners to opt out, which would in turn further increase future inequality and poverty risks, the report warned.

Pension freedom changes allowing people to withdraw partial lump-sums could further increase inequality as not all will be able to finance retiring earlier, the OECD warned. 

This was exacerbated by the fact the state pension did not allow early access, the report said.