Executive summary

Background

1. The working-age benefit system provides means-tested financial support to people with low incomes and assets, with additional support for those deemed to have certain disabilities, caring responsibilities or high housing costs. Means-tested support is also available for those above the state pension age (SPA) with low incomes and assets. Notably, the potential entitlements above SPA are much higher than those available below SPA, and this gap has grown substantially since the late 1990s. The standard full amount of means-tested support available through pension credit for a single person above SPA is 2.5 times the amount available for a single person out of work below the SPA through universal credit or jobseeker’s allowance. 

2. Much of the state support for people above the SPA comes through the non-means-tested state pension, and receipt of means-tested support is more prevalent among working-age people than pensioners. Around 19% of the working-age population (aged 18–59) are in receipt of universal credit or legacy means-tested benefits at any point in time, compared with 15% of people above SPA in receipt of means-tested support (pension credit and/or pensioner housing benefit). The prevalence of means-tested support is also lower in the year before state pension age (at 14%) than earlier in working age.

3. Disability benefit receipt (which is not means-tested, but eligibility to which is determined based on an assessment of functional limitations and care needs) is much more prevalent among those above the SPA, as rates of disability – in particular due to poor physical health – increase with age. Around 14% of those above SPA are in receipt of disability benefits (without means-tested support), compared with 3% of those aged 18–59 and 9% of those one year below SPA (aged 65).

4. Increasing the SPA is a sensible approach to managing the public finance pressures arising from increased longevity at older ages, as noted in a previous report of the Pensions Review in December 2023. But increasing the SPA reduces average incomes of those affected, and this reduction is concentrated among those who were already out of paid work before state pension age. Increases in the SPA therefore increase income poverty rates. And income poverty rates among those just below SPA (aged 63–65) are higher than those among any other age group of adults (at 26% compared with 21% among those in their early 40s). That said, this does not necessarily give a full picture of their standards of living. The rate of material deprivation – a measure of whether the household reports it can afford some basic goods and services – is lower among the 63–65 age group (at 16%) than among the rest of the working-age population (at 19%). 

5. While poverty rates among pensioners are lower than for the working-age population, there are some groups of pensioners where poverty rates are relatively high. The relative income poverty rate for pensioners who were privately renting in 2022–23 was 38%, compared with 34% among social renters and 12% among owner-occupiers. Private renters also have less security of tenure as landlords can increase rents, deny adaptations to the home or (at least at present) choose not to renew leases. Currently, only about 4% of pensioners are private renters, with 14% in social housing and the vast majority (82%) in owner-occupied housing. This means that, at the moment, the number of pensioners in relative income poverty who are owner-occupiers is higher (1.2 million) than the number of pensioners in relative income poverty who are social renters (0.6 million) or private renters (0.2 million). But issues around private renter pensioners are set to be more prominent in the future as current trends indicate that private renting in retirement will increase in prevalence – about 4% of those born in the 1940s were private renters in their mid 50s, compared with 10% of those born in the 1960s.

6. A key challenge facing the means-tested pensioner benefit system is low take-up of pension credit, with less than two-thirds of those eligible actually receiving this benefit. Pension credit tops up the incomes of low-income single pensioner households to £218.15 per week and couples to £332.95 per week. Around 1.3 million people were in receipt of pension credit in 2023–24, with older pensioners slightly more likely to be claiming it. In addition to the pension credit payments themselves, eligibility also ‘passports’ recipients to many other benefits such as (usually full) council tax support and, from Winter 2024–25, winter fuel payment. As the cliff edge in support for those who receive pension credit and those who do not grows, it becomes increasingly important that those who are eligible for pension credit receive it. 

7. As the pension credit amount is now below the value of a full new state pension, future generations of pensioners will be less and less likely to be eligible for any pension credit, which also means over time fewer people will be passported to the additional benefits. These will increasingly only be available for those who have only spent a relatively small fraction of their working life in the UK, or those receiving additional amounts due to entitlement to disability benefits or carer’s allowance. At the moment, the new state pension is £3.05 per week above the pension credit, whereas someone entitled to the severe disability premium due to receiving certain disability benefits could have other income of £78.45 per week (or over £4,000 per year) above the new state pension, while still being entitled to pension credit. The gap between the new state pension and pension credit is also expected to increase over time as the new state pension rises each year in line with the triple lock, whereas pension credit increases are linked to average earnings growth. 

Options for enhancing the working-age benefit system in response to a rising state pension age

8. Given that we know that increases in the SPA result in higher poverty rates among those affected, there is a case for spending some of the money saved on additional government support to offset some of these effects. This could also help maintain public and political support for the principle of increasing the SPA as longevity rises. 

9. There are different ways in which additional support to those with low incomes before SPA could be targeted. One option is to introduce a higher universal credit (UC) standard allowance for those just below the SPA, which would target support to those in that age group with low incomes and assets. We model the effects of a policy where the universal credit standard allowance is increased by 70% for those one year below the SPA (reaching a level that is halfway between the current UC allowance and pension credit). This policy could benefit over 160,000 low-income households who would be entitled to a higher UC amount, reducing the relative income poverty rate for those within a year of the SPA by 5 percentage points and lifting 31,000 households above the poverty line. We model the cost of this policy to be around £600 million, which is a tenth of the exchequer gain coming from a one-year rise in the SPA (both costings assuming no behavioural change). 

10. In addition to the direct cost to the public finances, this potential policy would reduce the financial incentive for those below the SPA to be in paid work – and those approaching retirement are known to be relatively responsive to such changes. This potential policy would give an out-of-work income of £670 per month for a single person, whereas under the current system people below the state pension age would have to work around 12 hours a week on the National Living Wage to achieve that income. 

11. An alternative policy to targeting additional financial support to those affected by an increase in the SPA would be to increase the amounts that are paid to those on universal credit and receiving health-related benefits. Those in poor health face more difficulty in remaining in paid work, and those with disabilities experience higher levels of income poverty and material deprivation throughout working life compared with non-disabled people. 

12. There are large differences in expected longevity between groups with different levels of wealth, and this can be seen as justification for providing additional support to all low-income and low-wealth households affected by state pension age increases. But beyond the differences in mortality by income and wealth levels, certain disabilities, such as having difficulties with activities of daily living (ADLs) or experiencing depressive symptoms before the age of 65, are associated with lower life expectancy. This is particularly true for those with lower educational qualifications – those with depressive symptoms before age 65 with no educational qualifications are 8% more likely to have died within the following 17 years than those without depressive symptoms, whereas there is no statistically significant association between depressive symptoms and mortality for those with a degree. This means that a one-year increase in the SPA will cut lifetime state pension entitlement for those in poor health (whose incomes are more likely to be reduced by increases in the SPA) by a bigger proportion, as they can expect to receive the state pension for fewer years than those in better health. 

13. We model the effect of a policy that boosts universal credit payments by £80 per week for those within one year of reaching SPA and who are in receipt of disability benefits (personal independence payment (PIP) or disability living allowance (DLA)). This amount is close to the additional support paid for those on pension credit who are in receipt of these disability benefits. Because this policy is more narrowly targeted, it would be smaller in scale (at a cost of about £200 million per year) than providing extra support to all those receiving universal credit just below the SPA. It would also be slightly less directly targeted to those on the very lowest incomes, as disability benefit prevalence tends to be lower among those in the bottom tenth of households in terms of income (especially as incomes of those living with disability tend to be boosted by receipt of health-related benefits). This would mean that the reduction in the poverty rate among this age group would be smaller (1 percentage point for those within a year of the SPA, lifting 3,000 households above the poverty line). 

14. An increase in universal credit allowances for people on disability benefits would weaken work incentives, though people receiving disability benefits are likely to be less responsive to these incentives in part because they are likely to already be out of work before being affected by the policy. However, this kind of policy would increase the financial incentive for people to apply for health-related benefits, also because many of those who start receiving working-age disability benefits will continue receiving them throughout retirement. Increased prevalence of health-related benefits since 2019 is already a concern, not least because of the enormous strain this is placing on the public finances.

15. In this report, we have chosen to model effects of increasing financial support for people up to one year below the SPA, and a government may want to introduce these types of policies at the same time as the SPA increases by a year. The state could of course also choose to provide more financial support to those further below the SPA. Or it could choose to target a narrower group, such as those within six months of the SPA. As illustrated above, there are trade-offs when it comes to implementing these policies, especially in terms of cost to the exchequer and work incentives. The younger the people affected by the policies, the more severe those trade-offs become. The government could also choose to go further (or less far) in terms of the generosity of these potential policies in ways other than the age groups affected. Making the system more or less redistributive is a political decision, and parameters that we have discussed here (as well as other aspects of the system) could be extended to do either.

16. A key feature of the means-tested benefit system below SPA is the ‘asset test’: people with assets of over £16,000 (including assets of any partner, and excluding primary residence and pensions) cannot receive any universal credit. This £16,000 limit has not been increased since 2006, which is a 40% real-terms cut. There is a strong case for at least uprating the asset test over time, as prices, earnings and average wealth have increased significantly over this period. This is particularly important in today’s pensions landscape where people are more likely to have sizeable defined contribution pension pots which they may access before reaching the SPA, currently from age 55. This may lead to some people inadvertently making themselves ineligible for means-tested benefits before SPA, as any assets withdrawn from a pension pot will be subject to the asset test. Lifetime ISAs, which can provide people – in particular the self-employed – a tax-efficient way of saving for retirement, should also be exempt from the asset test to align their treatment with other pension saving products.

The benefit system above the state pension age

17. We highlighted above the elevated poverty rates among pensioners living in private rented accommodation. While social renters are also a group that experiences relatively high poverty rates, private renters face a much lower level of state support than social renters. The maximum support for low-income single or couple private renters is (at the moment) equivalent to the 30th percentile of rents for one-bedroom properties in their area, regardless of whether such properties are readily available. At the same time, social renters face rents substantially below market rates and, above the SPA, are (unlike those below the SPA) not subject to what is known as the so-called bedroom tax, i.e. a reduction in their benefits for bedrooms that are deemed to be ‘spare’. Private renters also face additional risks, with less secure housing tenure and higher exposure to rent rises. 

18. A government concerned about the situation facing pensioners in private rented accommodation could increase the generosity of housing benefit above state pension age. One way to do this could be by using an additional bedroom to calculate the housing benefit rate. This would mean that the maximum support available would be equivalent to the 30th percentile of rents for two-bedroom properties in the area for singles and couples (rather than one-bedroom). We have modelled the effect of this policy and found that it would immediately provide additional support to the approximately 130,000 pensioner households whose rents are not currently covered by LHA (local housing allowance) rates, at a cost of £150 million per year. The number of people affected, and the cost to the exchequer, would likely rise over time as the prevalence of private renting in retirement increases. Providing support for an additional bedroom could particularly help those in areas where there are relatively few one-bedroom properties available, those who want a bedroom to be available for children or grandchildren to come and stay in their own bedroom, and for couples who want the option of having a bedroom each. Those who only want a one-bedroom property could also gain, as more such properties would have rents that could be covered by LHA. 

19. In order to address low take-up of pension credit, the government (as well as the previous one) has stated its commitment to integrating pensioner housing benefit and pension credit. Integration of the benefit system could go even further to integrate the working-age and pensioner benefit systems. This could have benefits such as improving claimant experience for those reaching SPA who are already receiving universal credit, making it easier for them to flow onto pension credit, and providing policymakers more flexibility in the treatment of couples with one below the SPA and one above it.