Targeted state support could help mitigate the impact of state pension age (SPA) increases, particularly for vulnerable groups, according to the Institute for Fiscal Studies (IFS).

Its new report on the means-tested benefit system around the SPA, published in partnership with the Abrdn Financial Fairness Trust as part of its multi-year review, suggested two ways in which targeted support could help those on low incomes deal with a higher SPA.

The SPA will increase from 66 to 67 between 2026 and 2028. The IFA noted that while this would yield around £6bn a year in savings for the public purse, it would “disproportionately hit” many low-income households, particularly those already struggling to remain in paid work until the current SPA.

The first of the two suggested avenues for targeted support was providing additional support to those on universal credit one year below the SPA.

It gave the example of an increase of 70 per cent to the universal credit standard allowance for this group, which the IFS said would be enough to halve the gap in one measure of the generosity of universal credit relative to pension credit and reduce the relative income poverty rate of the affected age cohort (around 30,000 households) by 5 percentage points.

The IFS estimated this measure would have an annual cost of around £600m, or a 10th of the exchequer gain coming from a one-year increase in the SPA.

The second suggested targeted support mechanism was to target increased support only at people receiving both universal credit and health-related benefits in the year prior to reaching SPA.

This measure was estimated to cost approximately £200m a year, targeting a narrower group and reducing the poverty rate among its age cohort of around 3,000 households.

The report argued that the benefits of any policy that increases state support for those on low incomes would need to be balanced against incentives, noting that higher universal credit allowance would come at the cost of some people having reduced work incentives.

Furthermore, targeted support through health benefits would increase the incentive for people to claim those benefits, which have already experienced a “dramatic increase” in caseloads, especially since the Covid-19 pandemic.

The IFS added that there could be a case for more targeted support for those on low incomes in their mid-60s than the options it had considered, although the cost and potential negative effects on employment would increase further if the scale of support grew.

It also assessed the risks within the current pensioner benefit system, particularly private renters, with pensioner poverty rates of private renters being the highest at 38 per cent, and the number of people in this group is rising.

The report stated that single private renters were one of the groups most at risk of falling into poverty in retirement, even with the full new state pensions, as it was often the case that that means-tested support they receive for housing costs was “not sufficient” to cover their rents in full.

In an effort to address this, the IFS modelled the effects of increasing pensioner housing benefit by allowing an additional bedroom for pensioners when calculating their maximum benefit rates.

This would result in both single pensioners and pensioner couples becoming eligible for support based on rents for two-bedroom homes in their local area.

The IFS said this change would provide immediate support to pensioner households whose rents are not covered by their housing benefit, costing around £150m a year, although this would increase over time.

“Increasing the SPA is a key policy to help the long-run sustainability of the public finances in the face of people living longer at older ages,” commented IFS senior research economist and report author, Heidi Karjalainen.

“But it does hit those on low incomes who are already not in paid work before the current state pension age particularly hard.

"Failing to support the most harmed groups risks undermining public confidence in the system and, in particular, the desirability of increases in the SPA.

“There is a good case for using some of the savings resulting from a higher SPA for targeted enhancements to working-age benefits for the most adversely affected groups in the run-up to SPA.”

Abrdn Financial Fairness Trust CEO, Mubin Haq, added: “Levels of poverty amongst private renter pensioners are three times the rate amongst owner-occupiers, with the number living in the private rented sector set to rise significantly. Hardship is also high amongst social renters; however, the situation for private renter pensioners is particularly worrying.

“Not only are rents higher, and there is less security of tenure, but state support with housing costs for those on low incomes often fails to meet actual costs or needs and it doesn’t tackle the low availability of one-bedroom properties.

“Increasing housing benefit to allow for a second bedroom would better meet the real cost of private renting and provide much-needed space for carers and family to support older people with their increasing health needs.”

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