Ministers seeking to boost Britain’s workforce should scrap pension freedoms and tax cuts that encourage the wealthy to retire early, according to an influential think-tank.
In a report on Tuesday, the Resolution Foundation set out several measures to address the post-coronavirus pandemic increase in economic activity. It is now a key focus for Chancellor Jeremy Hunt, as he looks for ways to boost Britain’s growth prospects in the Budget on March 15.
Hunt has promised reforms to help people with long-term health conditions or mental illness get into work, and has also called for people who took early retirement since the start of Covid-19 to return to the workplace.
But the foundation said the government should also review “grossly regressive” tax cuts that encourage some of the highest earners to start retiring from mid-years “at a heavy cost to taxpayers”.
It should be part of a general package of measures aimed at helping older workers and people with disabilities stay in work, and increasing childcare support to help mothers enter the workforce, he said.
The UK is unusual among advanced economies in that people rely more on private pensions than payments from the state. Private pension wealth in 2020 is almost 130 percent of gross domestic product, compared to just 8 percent in Germany.
People can start accessing a defined contribution private pension from the age of 55; the threshold will rise to 57 from 2028 but is still 10 years below the state pension age. They can also take up to 25 per cent of their pension pot as a tax-free lump sum up front.
“This amount is not limited, which means it is very regressive,” said the think-tank, calling it “hard to justify” the situation where the rich do not pay taxes for amounts that reach hundreds of thousands of pounds.
The foundation is calling on the government to raise the age at which people can access private pension pots and cap the tax-free amount, rather than increasing the state pension age – which it says will hit the poor with lower life expectancy.
But there is no point in persuading the “Covid cohort” of lost workers to return from early retirement, it added.
Despite near-record unemployment, the number of working-age adults not working or looking for work has risen by more than 500,000 to 8.9 million since the start of 2020, increasing staffing pressures in many sectors.
This is a reversal of pre-pandemic trends – where UK economic growth was driven by a growing labor force as more mothers and older women stayed in work. This is also unique to the UK, with labor force participation in most rich economies now higher than pre-pandemic.
But the foundation says that many people who leave the labor market as professionals have already paid their mortgages, do not claim benefits and are unlikely to “unretire”. Although the number of people out of work due to illness is also increasing, this raises the concern of those who left the workforce before the pandemic.
However, the think-tank said measures to keep older workers in work and support them will become more important over the coming decades as the UK’s population ages.
The Department for Work and Pensions says it is “reviewing” labor force participation to see what needs to be done. It added, as part of this work, it is looking at plans to increase support for the disabled and long-term sick, and expand employment support for the over-50s.