UK retirement age: when can I retire? State pension age - can retiring early hike inflation and interest rates
Rishi Sunak’s government has announced that plans to bring a state pension age change forward have been scrapped
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Retirement has been a subject that’s been in the news a lot of late, following Jeremy Hunt’s Spring Budget and the mass protests in France.
The Chancellor announced controversial UK pension reforms in his major speech earlier in March, as part of a bid to get more people back into the workplace. These included scrapping the upper limit for pension pots, and upping the amount you can put away in a pension without paying tax on it in a financial year. It came after warnings from business leaders and the Bank of England that the economy will struggle to grow if current high levels of labour shortages persist.
Meanwhile, France is seeing its biggest protests since the 2018 Yellow Vests movement as a result of Emmanuel Macron attempting to raise the state pension age from 62 to 64. Here in the UK, the government has now said it will scrap plans to lift the official retirement age to 68 before 2044 - although a review of the policy is scheduled to take place after the next general election in 2026.
The latest intervention on the issue has come from Bank of England governor Andrew Bailey. In a speech to London School of Economics (LSE) on Monday (27 March) he warned that the trend of retiring early could push up inflation, which would lead to higher interest rates.
So, what is the official UK retirement age - and why could retiring early speed up the rate of price increases?
When can you retire in UK?
Here in the UK, the state pension you can receive is governed by the number of years of National Insurance contributions (NICs) you have accumulated over the course of your working life. So, while the official age from which you can start receiving a pension is 66, you might not opt to take it until you’re older if you want to be eligible for the full amount.
The government is legally required to review the official retirement age every six years, with the last set of recommendations in 2017 suggesting a rise to 68 could be brought forward from 2044 to the late 2030s. Jeremy Hunt was even understood to be pushing for the age increase to be implemented from 2035 - almost a decade earlier than legislated for.
But the official retirement age will remain in place until at least 2026. The age limit is decided by average life expectancy, with the government basing its decision on the principle that no one should spend more than a third of their adult life in retirement. A gradual rise to 67-years-old is legislated to take place from 2026 and will apply to people born on or after 5 April 1960.
Those with private workplace pensions, especially ‘defined benefit’ schemes (i.e. where the pension amount is determined by years of service or your salary, rather than what you’ve paid in), may be able to retire earlier - although ages tend to be set at either 60- or 65-years-old. Minimum retirement ages also differ if you work in the police (60), as a firefighter (depends on where you’ve served in the UK, but can be as low as 50), or in the armed forces (55).
With the advent of automatic enrollment and less generous ‘defined contribution’ workplace pensions over the last decade, more of an onus has been placed on the individual when it comes to deciding the age at which you want to retire. By contributing part of your salary to a pension pot and receiving employer contributions, you may have enough money to retire and live comfortably by your sixties.
However, when it launched its ‘Living Pension’ standard earlier in March, the Living Wage Foundation said the legal minimum 8%-of-earnings pension contributions could leave “millions unable to afford even the basics in retirement”. Its new voluntary scheme pushes the figure up to 12% of a worker’s earnings and increases the amount a workplace has to pay in.
For savvy workers who earn well above the average UK income (£33,000), you can retire as early as you like, especially if you religiously invest and save your disposable income. ISAs, SIPPs and investing in funds can all help you to gather enough money to retire young.
Does retiring early impact inflation?
In a speech to LSE in March, governor of the Bank of England Andrew Bailey said recent increases to the number of people who are retiring early has led to higher inflation and, by extension, interest rate increases.
During the Covid-19 pandemic, he said growth in the number of UK workers “came to an abrupt halt”. Economic inactivity has increased and has not “unwound” with the economic recovery since the pandemic, with the country’s workforce currently still 132,000 people down on where it was in December 2019. Mr Bailey said it was “particularly striking” to note the increase in inactivity among 50- to 64-year-olds, with the age group now containing the largest number of inactive workers.
Although long-term sickness has “driven much of the persistent rise in inactivity” across all age groups during the pandemic, Mr Bailey said “many” in the 50-64 age category had contributed through early retirement. Given this change had not come about after “a shock to demand [for workers across the UK economy]”, the Bank of England governor said inflation could increase as a result.
“The rise in economic inactivity is a change to the supply of labour, independent of demand, in particular by older workers,” he said. “If those workers have accumulated enough savings to sustain a desired level of consumption much like the one they had before their early retirement, at least for a while, aggregate demand will not have fallen by as much as aggregate supply. We should expect this to put upward pressure on inflation in a way that would call for a higher level of interest rates to dampen demand.”
In other words, people who have retired young may have enough wealth to keep spending at the rate they did while they were employed. With this level of demand on the economy continuing at the same time as there aren’t enough workers in the UK to maintain supply, prices will continue to rise. Mr Bailey said this rise in early retirement already “seems likely to have contributed to a rise” in inflation.
His comments come after the UK’s central bank hiked interest rates to a fresh 14-year high of 4.25%. The 11th consecutive hike to the Bank’s base rate came after inflation rose unexpectedly to 10.4% in February 2023.