Will those who retired early return to the workforce to benefit from tax breaks?

There had been talk recently about ways of drawing some of the nearly nine million people of working age, who are not working or actively seeking work, back into the workforce. One focus has been older workers who have retired early, with suggestions that they could be lured back with targeted tax breaks such as increases to pension allowances. The Joseph Rowntree Foundation has prepared a report considering whether this policy is likely to have the desired effect.

Ceasing retirement

The report shows that 92% of those who cite early retirement as their primary reason for leaving the workforce report no desire or expectation to return to work now or in the future. Over 60% of all early retirees report net household wealth of over £1,000,000. Given their overall financial stability, the rumoured pension tax incentives or other tax cuts may not be a major incentive to return to work. Indeed, increasing such allowances could potentially backfire and result in some in active work saving more and retiring early, swelling rather than quelling the numbers out of work.

The sick and disabled

In contrast, the report outlines that approximately 2.7 million people are out of the workforce primarily due to illness or disability, an increase of 400,000 since the pandemic. In contrast to the above early retirees, these people are likely to be among the poorest and most vulnerable members of society. The poverty rate in this group is reportedly 38%, twice the poverty rate for all working-age adults (20%). If they can be brought back into the workforce, it could help a wider proportion of the community.

The foundation found that 46% of these people express a desire to move into work now or expect to work in the future. Policies to encourage this, rather than providing tax breaks to relatively wealthy retirees, may have a higher likelihood of success in increasing workforce numbers and provide arguably wider benefits to society as a whole.

Is tax the solution?

Often tax breaks can help government influence the behaviour of the public. In this case, the poor financial circumstances of the group out of work due to illness or disability mean that tax changes are likely to offer little incentive and other approaches to help and support participation may need to be offered.

The tax system is complex and in need of simplification. There needs to be a valid and proven reason to add another layer of complexity, particularly for the pension system, which is already confusing to many taxpayers.

As the foundation has suggested, incentives for employers to support workers and enable them to stay in or rejoin work may be a more effective plan than adjusting tax breaks for pensions.