The Institute for Fiscal Studies is proposing two ways to address high poverty rates among people in their early to mid-60s in a new report, saying this would help with public support for increasing the state pension age. In addition, report funder the abrdn Financial Fairness Trust is calling for more generous housing benefits for pensioners.

Poverty levels among people just before state pension age are the highest of any adult group already, and the IFS is suggesting that the cliff edge between working age and pensioner beneefits should be smoothed through some form of additional benefits.

In its report published on Wednesday, ‘Means-tested support for people approaching and beyond state pension age’, the IFS says increasing the SPA will disproportionately hit many low-income people, in particular those who already struggle to stay in paid work until the current state pension age and suggests increasing benefits for people a year before they reach state pension age. 

“There is a good case for using some of the savings resulting from a higher state pension age for targeted enhancements to working-age benefits for the most adversely affected groups in the run-up to state pension age,” said Heidi Karjalainen, senior research economist at the IFS. 

Not doing so risks undermining public confidence in the system and support for state pension age increases, she argued. 

Karjalainen noted that the asset test for working age benefits eligibility is exacerbating the issue of poverty among those just below state pension age because private pension pots are taken into account for the test as soon as they are accessed. This creates extra risk for those who take some of their pension – for example, the cash free lump sum – before state pension age.

She therefore suggested that the capital test should be uprated over time. Currently, only those with assets up to £16,000, excluding pensions and the main property, are eligible. Karjalainen pointed out that this nominal amount has been left unchanged since 2006, resulting in a 40% real terms reduction - had it been increased in line with prices or earnings, it would be at roughly £27,000 today. 

Putting in place extra support through universal credit one year below the state pension age is one way the institute says benefits could be increased before SPA.

"For example, an increase of 70% to the universal credit standard allowance for this group – which would be enough to halve the gap in one measure of the generosity of universal credit relative to pension credit – would be targeted at those on the lowest incomes and would reduce the relative income poverty rate by around 5 percentage points in the affected age group,” the IFS says, helping roughly 30,000 households.

The measure would cost about £600m, about a tenth of the savings made through a one-year rise in the state pension age, according to the economists. 

The other option the thinktank debates is to target increased support only at those receiving both universal credit and health-related benefits in the year before the state pension age, coming with a lower price tag of £200m but in turn only helping about 3,000 households. 

Making such changes to benefit policies could affect people’s behaviour if implemented, the report authors concede. 

They write that “higher universal credit allowances would come at the cost of some people having reduced work incentives. Targeting support through health benefits would increase the incentive for people to claim those benefits, which have already seen a dramatic increase in caseloads especially since the pandemic.” 

At the same time as considering pre-retirement support, the IFS suggests that housing benefits should become more generous for pensioners who rent. Renting in retirement is set to become more common, and current benefit allowances do not typically cover high rents.

With renting expected to drive much of future pensioner poverty, the IFS has modelled the effects of allowing an additional bedroom when calculating the maximum benefit rates for pensioners. 

"Pensioners often spend a lot of time at home, and it might be felt appropriate for pensioners to be able to have children or grandchildren over to stay in a room of their own, or for pensioner couples to have an additional bedroom for themselves should they need it,” the thinktank argued. 

The cost of the measure would initially be about £150m a year but would go up over time as the prevalence of renting in retirement increases. 

Mubin Haq, chief executive of the abrdn Financial Fairness Trust, which supported the research, stressed that levels of poverty among private renter pensioners are three times the rate among owner-occupiers. 

"State support with housing costs for those on low incomes often fails to meet actual costs or needs and it doesn’t tackle the low availability of one-bedroom properties,” Haq said. “Increasing housing benefit to allow for a second bedroom would better meet the real cost of private renting and provide much-needed space for carers and family to support older people with their increasing health needs.”

The IFS is among a number of experts due to give evidence to the Work and Pensions Committee in the first session of its pensioner poverty inquiry on 18 December.

Though pensioners are currently the least likely age group to live in poverty, the topic of pensioner poverty is receiving greater political attention again as rates have crept up slightly, following a big decrease over previous decades.

The new government's decision to introduce means-testing for winter fuel payments from this winter has, however, been the major trigger for debate, having led to an outcry from pensioner organisations, charities and politicians, partly because eligibility is dependent on receiving pension credit, which is underclaimed by about a third. 
 

   

   

   

Will SPA rises be better tolerated if 60-somethings receive higher benefits?