The labour force activity rate for the UK adult population has clearly dropped off since the start of the coronavirus pandemic, according to data from the Office for National Statistics released today.
The ONS said the recent fall, illustrated in its graph below, was down to a combination of ‘increased rates of long-term sickness’ and ‘a greater propensity for older workers to leave the labour market’.
The data comes after Bank of England Governor Andrew Bailey last night said that a sharp increase in the numbers of British workers retiring early since the start of the pandemic has been helping to push up inflation and therefore interest rates. He pointed out that after decades of expanding labour supply, there has been a sudden halt in the last three years, with a striking rise in economic inactivity among the 50 to 64 age group.
This tends to add to inflationary pressures as retirees with savings push up demand while not contributing to production and the supply side of the economy. In his Budget this month, Jeremy Hunt announced a number of expansions to pension contribution allowances – meaning that workers can save more into pensions while benefitting from tax relief – in an effort to reverse this trend.
However, Gary Smith, Financial Planning Partner at wealth manager Evelyn Partners, points out that the success of this strategy cannot be taken for granted.
“Certainly the scrapping of the lifetime allowance is likely to help with the exit from the workforce of NHS professionals with generous defined benefit contribution schemes. However, we might find that most people retire early because they actually want to, and if they do feel compelled to return to work, it’s probably because they feel financially squeezed by a combination of a soaring cost of living and a unexpectedly poor performance of pension investments.
“That’s not to say Mr Hunt’s measures are unwelcome: in the medium to long term they should iron out some distortions in and disincentives to pension saving. But they could also have some unintended consequences. For instance, lifting the annual allowance from £40,000 to £60,000 for the new tax year could help some savers to reach their ‘target’ retirement pot earlier than they otherwise would have done.
“On the other hand, for top earners the benefit of a higher annual allowance is severely limited by the unpopular and complicated taper, which from 6 April will kick in at an adjusted income of £260,000. This means that someone earning £500,000 who wants to save 10% of their earnings into their workplace pension cannot contribute £50,000 in the new tax year, but only £10,000 – which is the new minimum reduced annual allowance, raised from £4,000 in the Budget.
“Because of this what we might well see is frustrated high earners making use of their spouse’s annual pension allowance, if the spouse is entitled to the full £60,000 and not using all of their allowance.”