Weak income growth – widespread for richer and poorer people, older and younger people – has been with us since the Great Recession. Much of this poor growth has been replicated in other countries as the world has had to cope with the fallout from the financial crisis, COVID, and energy price rises. Even so the UK has been falling behind most other countries, including since 2019.
In new IFS research released today, funded by the abrdn Financial Fairness Trust, we set out seven key facts that summarise trends in households’ living standards. We focus on the trends since 2009–10 (the last year of the last Labour government) and over the course of this parliament (since 2019–20)
Key findings
1. The next government will need to decide whether to provide additional support to those not able to work up to an increased state pension age, and how any such support should be targeted, while considering the effects on work incentives and government spending. This is urgent as the state pension age will rise from 66 to 67 between 2026 and 2028. The government will also have to finalise the timing of the increase in the state pension age to 68. If it chooses to accept the recommendation of a previous independent review to bring the increase forward to the late 2030s, then those directly affected should be notified in the next few years (in line with the current government’s sensible commitment to provide at least 10 years’ notice of any change). Increasing the state pension age is a coherent response to increases in longevity at older ages, and one that other countries are also adopting. But it affects poorer people more, as well as those who find it more difficult to remain in paid work at older ages.
2. A long-term plan is needed for the level of the state pension. The triple lock, which both Conservative and Labour parties have suggested they will maintain, increases the level and cost of the state pension in an uncertain, and ultimately unsustainable, way. Current forecasts suggest maintaining the triple lock will cost around £1.5 billion per year by 2029–30 relative to earnings indexation, although the triple lock could cost less, or (as has been the case in recent years) far more than forecast. A better way forward is possible, where the government decides on the appropriate level of the state pension and then increases it to keep up with average earnings growth in the long run, but also commits to increase it by at least at the rate of inflation every year.
3. The next government needs to decide whether to go ahead with legislated increases in minimum pension contributions. If they do, they should carefully consider the timing, as well as potential alterations to the policy to help low earners adjust to lower take-home pay. The Pensions (Extension of Automatic Enrolment) Act was passed in 2023 but has not yet been implemented by the government. It would extend automatic enrolment to 18- to 21-year-olds and abolish the lower earnings limit for qualifying earnings. This latter change means additional total contributions of £499 per year (including from the employer and tax relief) for people with minimum contributions (8% of qualifying pay). For someone earning £10,000, this would lead to a reduction in take-home pay of at least 2.5% (£250), and likely more depending on how much wages adjust downwards given the policy.
4. The next government should target a long-term policy solution to support pension saving among the self-employed. Low rates of private pension participation for self-employed workers remains an unresolved concern. Around 20% of self-employed workers participate in a private pension, down from 50% in 1998. More employees earning less than £10,000 (and therefore not targeted by automatic enrolment) are saving in a pension (25%) than the self-employed. More needs to be done to make it easier for self-employed workers to save in a private pension (and for those who are already saving to save more), potentially by integrating pension saving into the Self Assessment system for self-employed people.
5. The next government should develop policies to help people draw on their private pension wealth appropriately. This could mean requiring pension schemes to provide people with decumulation pathways, including solutions that combine annuities with accessible savings pots. The government could also require schemes to provide default options, to ensure that these policies also work better for those who don’t engage actively with their pension. This is because, while the ‘pension freedoms’ reforms of 2015 have opened up opportunities for additional flexibility, they also expose more people to longevity risk (running out of private resources due to living longer than expected), and to more difficulties managing their incomes at older age.