PensionsFeb 6 2023

Drop in older workers could lead to taxation on pensions

Search sponsored by
Drop in older workers could lead to taxation on pensions
Surge in early retirement may have tax consequences to offset loss of skilled workforce. Photo by Marcus Aurelius via Pexels

The rise in people retiring at 50 and not returning to the workplace post-pandemic could result in higher taxation on pension pots and further rises in the state pension age, a senior economist has warned.

Ian Stewart, Deloitte's chief economist in the UK, analysed employment and immigration trends and warned that because "Britain’s labour has seen significant and unexpected change since 2020", there may be actions taken by government to make up for the loss of productivity.

He said: "The relatively high levels of personal wealth enjoyed by the over-50s could face increased levels of taxation and a further increase in the age at which the state pension becomes payable."

The pandemic has caused many people to re-evaluate their priorities.Ian Stewart, Deloitte

Stewart pointed to data from the Office for National Statistics, which has shown that three major factors are at work in the workforce: 

1) There has been a surge in the number of people retiring early, which has shrunk the workforce.

2) Increasing levels of migration from outside the EU have partially offset the ending of unskilled migration from the EU.

3) The pandemic has increased hybrid and home working, possibly by a factor of three.

Stewart explained: "More people are in work today than on the eve of the pandemic in most industrialised countries, though not in Britain. Its workforce has shrunk, mainly because of a rising number of people of working age withdrawing from the workforce."

Indeed, some 575,000 people have left work since the onset of the pandemic, equivalent to almost 2 per cent of the workforce.

While illness has played a part, with Covid-19 and delays in treatment on the NHS, fuelling levels of long-term sickness and disability, the majority of the leavers have been those taking early retirement. 

He said: "Retirement has surged among the 50- to 64-year-olds, most of whom own their own homes outright and have pensions and other savings. The pandemic has caused many people to re-evaluate their priorities and, for some, led them to opt for early retirement.

"In the UK, private pensions and the option to take 25 per cent of pensions as a tax-free lump sum provide more flexibility over the timing of retirement than in much of the rest of Europe where state provision plays a larger role."

Various opinion polls have suggested that most of these early retirees seem unlikely to return to work. Indeed, almost all the rise in inactivity is among people who say they do not plan to work again. 

However, he added: "Despite telling pollsters they are unlikely to return to work, some early retirees will find the lure of work, and the challenge, social connection and money that comes with it, irresistible."