How Have Pensioner Incomes And Poverty Changed In Recent Years?

19th July 2024

Average pensioner incomes and pensioner poverty.

Before, and during, the Great Recession, average pensioner incomes were catching up with working-age incomes. Between 2002-03 and 2011-12, median pensioner incomes grew by 22% (after adjusting for inflation), whereas incomes of working-age adults fell by 3%, due to slow growth prior to 2007 and big falls in incomes during the Great Recession. Poorer pensioners' incomes were growing at a similar rate to average pensioner incomes prior to 2011, leading to relative pensioner poverty falling from 25% in 2002-03 to 13% in 2011-12.

2. Since 2011, average pensioner incomes have been growing at a similar rate to working-age incomes. Average incomes for pensioners - which are now very similar to average incomes below state pension age - grew by 12% from 2011-12 to 2022-23, driven by higher state and private pension incomes. This growth was almost identical to the growth in average working-age incomes of 13% over the same period - driven up by rising incomes from employment.

3. However, since 2011, income growth for poor pensioners has lagged behind the population as a whole. From 2011–12 to 2022–23, incomes for poor pensioners (at the 10th percentile of the pensioner income distribution) rose by only 5% (after adjusting for inflation). This is in part because poor pensioners have benefited from neither the rises in employment income nor the rises in private pension income that pushed up incomes for people on middle incomes.

4. This slow income growth for poorer pensioners means that relative pensioner poverty rose from 13% in 2011–12 to 16% in 2022–23, equivalent to an increase of 300,000 pensioners. A key reason for low income growth for poor pensioners has been that growth in state pension incomes has been offset in large part by falling levels of other benefits – higher state pensions increase pensioner incomes, making them increasingly ineligible for further means-tested state support. Indeed, for the poorest third of pensioners, state pensions rose by 6% between 2011–12 and 2022–23 but total benefit incomes (including state pensions) only rose by 1%. In other words, the support that poor pensioners get from the state increasingly comes from the state pension, rather than the means-tested benefit system.

5. In the years since the onset of the pandemic (2019–20 to 2022–23), lower-income pensioners experienced higher income growth than higher-income pensioners, as they received more state support during the cost-of-living crisis and have benefited more from falling (real-terms) housing costs. Indeed, relative income poverty among pensioners fell from 18% to 16% between 2019–20 and 2022–23.

6. However, these income poverty statistics understate the financial difficulties faced by poorer pensioners, as they do not account for the fact that poorer households are more exposed to sharp rises in gas, electricity and food prices. Pensioner material deprivation – a measure of the household's inability to afford key essentials – rose from 6% (700,000 pensioners) in 2019–20 to 8% (1 million pensioners) in 2022–23. For example, the fraction of pensioners who could not afford to keep their home warm rose from 2% to 5% (230,000 to 570,000 pensioners).

Trends in different sources of pensioner incomes
7. Before the pandemic, the average incomes of pensioners were pushed up in part by rising state pension incomes. This was due to a combination of triple-lock indexation of the basic state pension since 2011, the introduction of the new state pension in 2016, successive generations of women having spent more years in paid work, and both men and women having accumulated higher earnings-related pensions. Reforms in 2010 and 2016 also substantially boosted the state pension incomes of many women (notably by comprehensive ‘crediting' for those who spent long periods out of paid work looking after children). As a result, the gender gap in state pension incomes has all but disappeared for those born after 1950.

8. Despite large increases in state pension incomes for women born since 1950 (and higher average household incomes among pensioners), these changes have not led to large falls in relative income poverty for these women compared with previous generations at the same age (in their late 60s and early 70s). In part this is because the reforms of 2010 and 2016 were designed to boost the incomes of (generally) women with low state pension incomes, rather than boosting the incomes of pensioners with low household incomes. It is also due to higher state pensions leading to falls in eligibility to other benefits for low-income families.

9. Rising incomes from private pensions have been the largest single contributor to growth in average pensioner incomes over the last two decades. This is a result of both gradually increasing coverage (54% of pensioners received income from private pensions in 2019–20 compared with 50% in 2002–03) and increasing amounts received (the average private pension income among those with positive incomes rose from £4,700 to £7,600 a year over this period).

10. Average income from employment (including self-employment) among those aged 66–74 has also been rising gradually over time. This is mainly due to rising employment rates but is also due to rising average earnings among those in paid work. While employment income is not the key income source in older age nor is it the key driver of changes over time, on average it makes up just over half of total household income for working households in their late 60s and early 70s.

4.1 Introduction
Pensioners – the population above the state pension age, currently 66 – make up about a quarter of the adult population in the UK. Given the size of this group, trends in pensioner incomes play an important role in determining trends in the distribution of living standards in the population as a whole. The composition of pensioner incomes, and the factors driving changes to them, are markedly different from those for the rest of the population. Most working-age households receive most of their income from employment, meaning that trends in earned incomes are the key determinant of their incomes. However, only a small minority of pensioners receive significant income from employment.

Pensions – received from either the state or from private sources – make up the majority of income for most pensioners. Pension incomes are driven by a combination of factors such as policy reforms, past employment patterns and the types of pensions offered by employers. State pension entitlements in particular have been subject to substantial reform since the mid 1970s.

Pensioners in low-income households also face a considerably more generous benefit system than working-age households (Cribb and O'Brien, 2022), albeit one where there remain serious challenges around take-up – DWP estimates show that only six out of ten of those entitled to pension credit claimed the benefit in 2021–22 (Department for Work and Pensions, 2024a). Finally, patterns in housing tenure among current generations of pensioners are in stark contrast to the patterns among those under state pension age. Around 74% of pensioner households in 2022–23 owned their home without a mortgage, while 4% owned with a mortgage; 17% of pensioners were social renters and only 5% private renters. By comparison, 23% of working-age households are owner-occupiers without a mortgage and 35% with, while 17% are social renters and 23% private renters. This means that average housing costs among pensioners are generally low, and few pensioners are exposed to changes in either mortgage rates or the private rental market compared with working-age households.

Despite the importance of pensioner incomes in their own right, and the implications for the population as a whole, there has been relatively little work in recent years taking a broad perspective on how pensioner incomes have changed in recent decades. This chapter seeks to remedy that, focusing on three key areas.

First, we provide new evidence on trends in average pensioner incomes, how unequal pensioner incomes are, how that has changed in recent years, and how these trends have fed through to measures of income poverty and material deprivation among pensioners. While the focus of our research is on recent trends, we put these changes in the context of the last 20 years. As incomes measured before and after housing costs are generally similar for pensioners (as housing costs are, on average, low), we mostly illustrate overall incomes after deducting housing costs in order to ease comparability with trends for working-age people, most of whom face significant housing costs.

Second, we dig into more detail on how income from state pensions and benefits has changed over time for pensioners, splitting out changes in state pension incomes from changes in income from other benefits (such as means-tested or disability-related state support). In particular, we show how state pension incomes have changed among recently retired pensioners, and how those changes compare with changes in income from other state benefits.

Finally, we consider the importance of private sources of income for pensioners, both income from private pensions and employment income. These sources of income are more important, on average, for higher-income pensioner households, and the importance of private sources of income has grown in recent decades. This increase is driven by increasing rates of employment among pensioners, as well as higher private pension participation rates meaning that more people are approaching pension age with a private pension.

Before we proceed to the analysis, it is worth noting that our definition of pensioners focuses on people aged 66 (the current state pension age) and over. This means that the changes in average income among our definition of pensioners are not affected by state pension age increases.1 Previous analysis has shown the effects of increasing the state pension age on household incomes (notably, Cribb and Emmerson (2019) and Cribb and O'Brien (2022)), finding that increases in the state pension age substantially reduced average incomes and pushed up income poverty rates.

4.2 Pensioner incomes and living standards over the last 20 years
Trends in pensioner incomes
We start this section by analysing median household incomes of pensioners and how they compare with those of working-age households, as shown in Figure 4.1. As in the rest of this report, incomes are equivalised using the modified OECD equivalence scale and expressed in terms of equivalent amounts for a childless couple.2 While equivalisation could affect the long-run trends in incomes if the composition of households changes over time, the overall trends in unequivalised incomes are similar to what we show in this report (see Department for Work and Pensions (2024b) for analysis of unequivalised incomes). The incomes shown are measured as net incomes (after direct taxes and other transfers), in 2022–23 prices. The graph shows incomes both after deducting housing costs (AHC) and before deducting housing costs (BHC).

Read the full IFS report HERE
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