Labour is being urged to use savings generated from confirmed state pension age increases to administer target support to vulnerable pensioners.
The state pension age is set to rise from 66 to 67 between 2026 and 2028, delivering around £6billion annually in revenue for Chancellor Rachel Reeves in the Treasury.
However, this increase will have a disproportionate impact on low-income individuals, particularly those who already find it challenging to maintain paid employment until the current state pension age.
A new report from the Institute for Fiscal Studies (IFS), in partnership with the abrdn Financial Fairness Trust, has outlined potential solutions to support vulnerable groups affected by this change.
The report, published as part of The Pensions Review, proposes two targeted support measures that could help mitigate the effects of a higher state pension age.
The cost of these proposed support measures would represent only a fraction of the savings generated by increasing the state pension age.
According to the report’s findings, the first recommended measure would provide additional support to those on Universal Credit who are one year below the state pension age.
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State pension age rise ignites calls to reform Universal Credit to ‘alleviate poverty’
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This would involve a 70 per cent increase to the means-tested Department for Work and Pensions (DWP) benefit’s standard allowance for this group, helping to halve the gap between Universal Credit and Pension Credit.
The measure would target those on the lowest incomes and could reduce the relative income poverty rate by around five percentage points, benefiting approximately 30,000 households.
Furthermore, the second proposal focuses on providing increased support specifically to those receiving both Universal Credit and health-related benefits in the year before reaching state pension age.
It is understood that this more narrowly targeted approach would help around 3,000 households escape poverty.
The IFS estimates the first measure would cost £600million annually, while the second would require £200million per year.
State pension age will rise to 67 by 2028 then it will further increase to 68 GETTYThe report’s authors, Jonathan Cribb Carl Emmerson and Heidi Karjalainen, acknowledged there would be potential “trade-offs” if these proposed measures were implemented by the Government.
“These measures would help alleviate poverty among those just below the state pension age , but they come with trade-offs,” the authors stated.
“Both would directly add to spending on the working-age benefit system, although with costings of £0.6billion and £0.2bn per year.”
The trio noted that these sums are relatively smaller compared to the £6bn in fiscal savings that are made every year by raising the state pension age threshold to 67.
They added: “Both options would reduce financial incentives to work for those approaching the state pension age.
“For people of this age who are in good health, this reduction will be of particular concern because their labour market decisions are likely to be influenced by the financial incentives they face.
“In contrast, those in poor health will typically be relatively unresponsive to diminished financial incentives to work.
“But targeting additional support based on health conditions would increase the incentives for people to apply for disability benefits.
“Despite these trade-offs, there is a good case for using some of the public finance savings resulting from a higher state pension age for additional targeted support to the most affected groups.
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“Not least as this might help maintain public and political support for increasing the state pension age as longevity at older ages increases further.”
As it stands, the Government is planning to hike the state pension age from 66 to 67 between 2026 and 2028.
It has also scheduled a further review within two years of the next Parliament to review recommendations for an earlier increase to 68.
In March 2023 an independent review of the state pension age by Baroness Lucy Neville-Rolfe recommended an increase to 68 between 2041 and 2043.
As a result, state pension expenditure would be capped at six per cent of the UK’s gross domestic product (GDP).
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