“Saved enough to stop work?” – the impact of pension freedoms on the labour market

Universal credit claimants will be forced to search for jobs outside their preferred sector after just four weeks or face the prospect of sanctions, under a controversial tightening of the benefits system.

Therese Coffey, the work and pensions secretary, said the move would help people “to get any job now” and forms part of a new government drive to get 500,000 jobseekers back into work by the end of June.

The problem , according to Tony Wilson is not as it seems

And maybe the DWP are barking up the wrong tree

This is not a welfare problem. it’s a problem with participation. A large proportion of the population is not claiming universal credit or working

Early retirement?

The Labour Force Study conducted by the Office of National Study makes for dismal reading. Here is the IES’ assessment

Employment remains 600 thousand below pre-pandemic levels while economic inactivity is 400 thousand higher.
This growth in inactivity is increasingly being driven by higher worklessness due to ill health, which is up around 200 thousand in the last six months (and by 230 thousand
since the pandemic began). It is also rising for young people outside full time education, and falls in labour force participation have been particularly large for older people.

In all there are now 1.1 million fewer people in the labour force than we would have expected to see based on pre-crisis trends, and older people account for three fifths of this ‘participation gap’.

I queried this final finding quoting from recent IFS research  which suggests that many people who have no income but the state pension are working longer

The increase in employment resulting from the higher state pension age is due to people staying in their existing job for longer, rather than to those in work moving to a different employer or those not in paid work returning to the labour market. It is predominantly due to increases in full-time work rather than part-time work. For men it is disproportionately driven by the self-employed, while women working in the public sector are particularly likely to delay retirement due to the reform.

I would suggest that what is  being missed is the “pension effect”

Women are working longer because they are no longer in receipt of a pension from 60, the self-employed are working longer because they have little in the way of a private pension and no other source of income.

Meanwhile 630,000 people in their late fifties and early sixties are not working but accessing their retirement savings early. There is evidence of this from the FCA’s retirement income survey covering those with retirement pots created through personal pensions,

That’s 1.6m pots being drawn on , the majority of which were cashed out into people’s bank accounts. The vast majority of pots cashed out were under £30,000, suggesting this money is not being used to provide lifetime income.

These numbers exclude annuities purchased and pots  being drawn down or  cashed out from occupational DC schemes.

TPR’s latest data shows that the number of people  “retiring” from occupational DC schemes  increased by 24% between the end of 2020 and 2021 (from 121,000 to 151,000).

This does not even touch on the numbers taking pensions “early” from Defined Benefit schemes.

My experience is that most people of my age are not working five days a week but using retirement savings and/or pension income either to stop work or to work part time.

Is this the money allowing 630.000 to choose not to work ?  Are the pension freedoms creating the participation problem?

Adjusting for the pensions effect

I spent part of yesterday listening to a debate on the Labour Force Study and the new ONS real time information on participation rates.  I asked a question as to whether there was a pension effect in labour trends and this seemed to be an area that nobody is thinking about.

People who work in pensions worry about the sustainability of pension pots which are drawn on heavily prior to people’s state pension age. Meanwhile economists lament the absence of people of this demographic from the labour market.

They ask the question “where are the older workers“, the answer just might be that they are busy spending their savings.

But while those with retirement savings have the freedom to use them as a means to stop work early, those without pots to draw on – are working longer. If my reading of the situation is correct, we have a pensions effect that bi-furcates the older workforce. I agree with Tony Wilson, this does not look like a welfare problem. It is a problem with participation and that problem is created by the weight of money becoming available to people from aged 55.

Rather than chasing after those on welfare, Therese Coffey might focus on encouraging those in later  life to keep working, keep saving and to delay gratification.

Otherwise we risk people running out of retirement savings way too early and HMT out of productive workers to support their healthcare and income benefits in later life.

Therese Coffey



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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6 Responses to “Saved enough to stop work?” – the impact of pension freedoms on the labour market

  1. John Mather says:

    Lifetime income based on a £30,000 pot? Somewhere in the range of £113-177 per month without any inflation protection. RPI in December 7%+ Drawdown is not the problem

  2. henry tapper says:

    Those accessing small pots do not generally drawdown but cash-out. Plans fully withdrawn at first time of access in 2020/21 also fell by 9% to 341,404. 9 out of 10 of these were for pot sizes less than £30,000. But £30k in the bank is about two year’s take home for someone on £20kpa – enough for many people to take time out, the average person is retiring on around £62,000 in retirement savings. Still not enough for a lifetime income but perhaps enough to go part time or take a long break from work.

  3. Peter Wilson says:

    I’m “at that age” (58) where I’m on the cusp of putting my pot(s) into drawdown and quitting the labour market. Why? To a large extent because my job, like many others, have been willfully devalued over the last 20 years. In todays money, I was earning about 120K in 2000. Now I earn £60K and there’s very little interest in keeping older employees interested in the work and in remaining working. Like many people my age I find my outgoings now the mortgage is gone and the kids have fled the nest are significantly lower than they used to be. I have enough savings for a modest income, a house I can downsize from if things get too tight and a host of fairly inexpensive hobbies I want to pursue. I *could* work for a few more years and end up with a more padded retirement but what used to be a passion (my job) has become an under-appreciated drudge and I think that’s true for very many people. Without the pension freedoms that would be much more difficult, but only because of the pitiful annuity rates on offer.

  4. Peter Wilson says:

    Re-reading my last comment, I completely missed getting over what I think is one of the main reasons older people are leaving the workforce.

    Younger people generally have far fewer options and have a new passion for what they do. They have to work and often love the freedoms work brings. I think many employers, especially smaller ones of which we have many in this country, exploit that. It’s almost like they are doing you a favour giving you work rather than an equal trade of work/expertise/skill for payment. How many workers are told they can’t leave the office early for one reason or another while at the same time expected to work late if there’s a busy period?

    Older people get to the point where work becomes a choice. They’ve also been around the block enough to be more questioning and cynical. It’s then incumbent on employers to recognise that and treat the employee/employer relationship in a more balanced way. This should of course be the case for all ages.

    The key to keeping older people in the workforce, especially professionals, is to feed to the passion those people used to have for their work and to remove as many barriers as possible to them enjoying that work.

    The pension freedoms aren’t what are causing people to leave work early, it’s that employers aren’t giving those people a big enough incentive to stay.

    Sorry, not really a comment on pensions but addresses one of the subjects of this article and the “great resignation” topic that’s in the news a lot at the moment.

    • henry tapper says:

      I think that pension freedoms are giving people the money to walk away from work and agree that work becomes less pleasant as you get older! Philip Larkin presented alternatives

      Why should I let the toad work
      Squat on my life?
      Can’t I use my wit as a pitchfork
      And drive the brute off?

      Six days of the week it soils
      With its sickening poison –
      Just for paying a few bills!
      That’s out of proportion.

      Lots of folk live on their wits:
      Lecturers, lispers,
      Losers, loblolly-men, louts-
      They don’t end as paupers.

      Lots of folk live up lanes
      With fires in a bucket,
      Eat windfalls and tinned sardines.
      They seem to like it.

      Their nippers have got bare feet,
      Their unspeakable wives
      Are skinny as whippets – and yet
      No one actually starves.

      Ah, were I courageous enough
      To shout, Stuff your pension!
      But I know, all too well, that’s the stuff
      That dreams are made on:

      For something sufficiently toad-like
      Squats in me, too;
      Its hunkers are heavy as hard luck,
      And cold as snow,

      And will never allow me to blarney
      My way of getting
      The fame and the girl and the money
      All at one sitting.

      I don’t say, one bodies the other
      One’s spiritual truth;
      But I do say it’s hard to lose either,
      When you have both.

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