The latest UK Budget focuses on encouraging people to work for longer and enticing retirees back by scrapping tax restrictions on bigger pension pots. Will it work, or are there another reasons people are leaving the workforce?
The government has a bee in its bonnet about early retirement. Last autumn, Rishi Sunak complained that there were too many “economically inactive” people of working age. Estimating that around an extra 630,000 were no longer in the labour market compared to pre-pandemic 2020, this became known as ‘the Great Retirement’.
With over half a million more people no longer in work, or even looking for work, this has created a huge shortage of skilled labour, most notably within the NHS.
So it was that Sunak launched a ‘midlife MOT’ initiative that aimed to essentially ‘woo’ early retirees back to work. Fast forward to March 2023 and we have the new Chancellor, Jeremy Hunt, announcing measures explicitly designed to discourage workers from retiring and coaxing back those who’ve already taken the plunge.
Along came the Spring Statement
Hunt announced three key measures in March 2023 to make it easier for over-50s to carry on working.
First, and one of the headline Budget measures, was the removal of the Lifetime Allowance (LTA) for pensions from April 2023. The LTA means you could only hold a certain amount in combined pension benefits before tax penalties of 25% or 55% kicked in.
Although the LTA threshold seemed high at £1.07 million, it was quite easily met by many who had valuable defined benefit/final salary pension benefits or several pensions earned over decades of working. Losing a significant chunk of any additional accrual to LTA tax charges was a major disincentive to growing larger pension pots.
By taking the LTA away, Hunt has lifted a large financial barrier to ever-increasing pensions, and by doing so especially hopes to stem the flow of senior doctors and consultants leaving the NHS.
Hunt’s second tactic was increasing the annual tax-free pensions allowance by 50% from April, from £40,000 to £60,000. This is similarly designed to encourage more people to keep working and building up their pensions without fear of losing a large portion to the taxman.
Lastly, there are plans to boost the ‘midlife MOTs’ and introduce special apprenticeships (dubbed ‘returnerships’) and ‘skills bootcamps’ to give over-50s more options in the employment market.
Read more about the 2023 Spring Statement here
Is there really a Great Retirement?
Diving deeper into the stats reveals that it’s not all about rich doctors swapping the surgery for the golf course. Leaving paid work happens for all sorts of reasons, especially when there’s a pandemic in the mix. The figures show that retirement hasn’t been the main trigger for the labour exodus – it’s actually ill-health. With long-term sickness the highest it’s ever been at 2.5 million people, perhaps the focus should be on the ‘Great Sickness’ instead. Almost half of the 630,000 cited by the government are under 50 anyway, with many still in full-time education.
Recent ONS research suggests that the number of retirees has actually decreased since the start of the pandemic. So much for lockdowns refocusing priorities and steering the 50-somethings to a slower pace of life!
What really drives retirement
Whether there is or isn’t such a thing as the Great Retirement, we think there’s one major problem with trying to undo it. And that’s the simple truth that the real reason many people retire is because they want to!
This is certainly true of Goodmans’ typical clients – generally independent Gen Xers who value time and experiences over material things. After dedicating decades of their life to work, they want to stop and enjoy time on their own terms while they’re still fit and healthy enough to make the most of it. So as soon as they can afford to retire, they do! No amount of tax relief will change that.
Of course, early retirement isn’t a luxury everyone can enjoy. But for many people who have spent a lifetime saving and paying into pensions, and who want to enjoy the simple things in life, it’s an achievable option.
For those who want (or have) to ‘unretire’ or carry on working through their 50s, 60s and beyond, the pension reforms will be welcome news. But for anyone else, a quality financial plan and a good bucket list are what makes a great retirement a reality.
If you want to see if early retirement can be an option for you, contact us for honest, independent financial planning advice.
