Fertility, longevity, migration, and age distribution are not just social statistics – they impact productivity, savings, inflation, and interest rates. In this article, I’d like to focus on what this means for the UK in the context of the third consecutive year of a decline in its fertility rate. This fell to 1.41% in 2024 for the UK, with a record low of 1.25% in Scotland, marking the third consecutive year of decline and well below the replacement rate of 2.1% to maintain population stability. It is the lowest since comparable records began in 1938. Projections suggest a continued decline unless reversed by policy, which appears to have little impact, or by cultural shifts.
With a growing proportion of older citizens in the UK population due to longer life expectancy and declining fertility, the economic consequences for the UK of these trends are profound and cannot be overstated. Although the political focus is on migration, the biggest change is happening below the radar, and it’s due to an ageing population. Irrespective of these facts for some it’s a plan buy a secret cabal to reduce European population – the’ great replacement theory’ – via migration from overseas.
Table 1. UK is ageing fast (share of population over 65 (2040 estimate)
Japan 35%
Germany 30%
United Kingdom 25%
USA 22%
Sweden 21%
India 21%
Nigeria 5%
Source: UN population projections
From pensions and productivity to inflation and fiscal sustainability, demographic change is no longer a slow-moving event with little impact; it is increasingly affecting the present and is becoming a central force shaping the UK’s economic future. This article consolidates the latest data and places the UK in a global context, revealing how its ageing trajectory diverges from that of many of its peers. It also suggests ways to mitigate its effects, leverage the upside and minimize the downside, to inform necessary strategic planning and policy reforms required to sustain economic growth and prosperity.
While ageing is a global phenomenon, the UK is doing so at a faster speed than many advanced economies and far ahead of most emerging markets (as shown in Table 1), mitigated only by migration. By 2040, nearly one in four UK residents will be aged 65 or older – a demographic milestone with significant economic implications, mostly negative. The share of the population aged 65 and over is projected to rise from 18% today to nearly 25% by 2040. The 80+ cohort will continue to grow rapidly, driven by increasing life expectancy and the ageing of the post-war baby boom generation. The decline has been driven by a fall in fertility rates, as shown in Table 2. Low fertility means fewer future workers, lower natural population growth, and rising dependency ratios. Unlike the US or Sweden, the UK lacks a sufficiently large youth base or a high enough fertility rate to offset this trend.
(Source: ONS projections, CIA Factbook) |
Compared to India or Nigeria, whose youthful populations offer growth potential if harnessed, the UK faces a narrowing window for demographic-driven expansion. Ageing societies typically experience slower GDP growth due to shrinking labour forces and lower productivity growth. Compare this with similar societies that have younger populations, which, when matched with education and infrastructure, can drive higher potential output and innovation. Without countervailing action, this will reduce per capita growth and strain public service funding. Therefore, long-term economic growth sustainability requires structural reforms that raise productivity.
Inflation dynamics
Ageing can be disinflationary (think of Japan): older populations tend to spend less, dampening demand-side pressures. However, rising healthcare and pension costs, coupled with a shrinking labour supply, may exert upward pressure on prices over time.
What evidence do we have for the UK so far in view of these implications? Ageing is already reducing labour force participation, especially among the 60+ group. This could lower trend productivity, unless offset by capital deepening, increased skills, and a rise in the participation rate of the 60-plus group. Another implication is that the equilibrium jobless rate may fall as older workers exit the labour market, but so might overall output.
Interest Rates and Savings behaviour
The UK’s household saving ratio spiked during the Pandemic at 27.4% but has since settled around 11.1% amid cost-of-living pressure. The life-cycle hypothesis suggests that individuals save most during their middle years and dissave in retirement. As ageing accelerates, global savings initially rise during the middle years – contributing to the secular decline in real interest rates observed over the past three decades. However, as retirees begin to draw down their savings and dependency ratios rise, this trend may reverse, and savings could fall, although this does not appear to be happening currently. Instead, increasing longevity and better health as people age may mean this gets delayed and pushed further out.
Table 3: Projection: Ageing could lift the national savings rate*
Year Popn 55+ (%) Avg saving rate(%) Total household saving, £bn est
2025 32% 10.8 £1,050
2030 35% 11.6 £1,220
2040 38% 12.4 £1,430
(Source: UK National Savings Report (*Assumptions: Population aged 55+ rises from 32% to 38% of total population, average savings rate for 55+ cohort remains ~15%, younger cohorts maintain ~8–10% savings rate))
As the population aged 55+ rises from 32% to 38% by 2040, the UK could see a structural increase in household savings, as shown in Chart 3. Older cohorts hold the bulk of financial assets, while younger groups struggle to accumulate wealth. This imbalance affects consumption, investment, and intergenerational equity. This implies a potential £380 billion increase in household savings over 15 years – primarily driven by demographic ageing (these figures assume stable income growth and no major pension reform shocks). And means that interest rates could be even lower in future and suggest that policy makers will end with lower actual rates as they adapt to a lower natural rate stemming from a higher savings supply.
The Bank of England’s neutral rate has already declined from ~2.5% pre-2008 to ~0.5% today, according to its own research. Ageing could entrench this trend, making long-term investment more attractive and feasible. Still the actual rate – while remaining below the long-run average of 4.7% – has been higher than this natural rate for a significant period and is, in fact, higher than the G7 average. Overall, lower interest rates reduce the hurdle rate for investment, making more projects financially viable. This is especially important in the UK, where business investment has underperformed relative to its G7 peers:
- Gross Fixed Capital Formation (GFCF) in the UK remains below OECD averages.
- British Chamber of Commerce (BCC) forecasts show business investment growth of just 1.6% in 2025, but this could accelerate if borrowing costs fall and savings rise.
- Sectoral impact of increased saving: Infrastructure, green energy, and digital transformation stand to benefit most from cheaper capital costs.
Labour market and productivity
Ageing is already affecting labour force participation. As older workers retire, labour force participation declines. The UK’s participation rate among those aged 65 and above is just 11%, compared to 79% for the 16–64 group. That exit of older workers, especially post-pandemic, has tightened labour markets and contributed to wage pressures. Unless offset by automation, skills investment, and flexible work arrangements, ageing could lower trend productivity and potential output.
The UK’s productivity puzzle – stagnant growth despite technological advances and net migration – may be partially driven by demographics. A smaller, older workforce requires more capital deepening and innovation – which are poor in the UK – to sustain output growth. Fewer workers, slower innovation diffusion, and rising dependency imply weaker productivity gains. That structural tendency has not been wholly offset by an influx of skilled and unskilled workers from overseas, which is also now seemingly creating political tension. Policies to encourage older workers to stay in employment, such as retraining and tax incentives, could help mitigate this drag.
Fiscal and Monetary Policy Implications
- Rising demand for healthcare and pensions will strain public finances.
- Monetary policy may need to adapt to structurally lower neutral interest rates and more frequent supply-side shocks.
- Ageing will strain public finances. Pension and healthcare costs are expected to rise, while tax revenues may stagnate if labour force growth slows. The shift from defined benefit to defined contribution schemes has left many underprepared for retirement. Although Auto-enrolment has increased participation, average contributions remain low.
- The triple lock policy – guaranteeing pension increases by the highest of inflation, earnings, or 2.5% – is fiscally unsustainable, projected to add £15.5 billion annually by 2030.
However, there are opportunities from human capital:
- older professionals offer mentorship, continuity, and entrepreneurial resilience.
- civic engagement: Adults aged 65+ volunteer, govern, and anchor communities.
- wealth stability: older households hold over 60% of UK housing wealth, supporting financial markets.
- health innovation: ageing drives demand for health tech and wellness services.
- cultural enrichment: lifelong learning and arts participation sustain public discourse.
The “silver economy” is projected to reach £550 billion by 2035, encompassing travel, leisure, healthcare, and financial services tailored to older adults.
For the UK, the demographic transition presents both risks and opportunities. However, with strategic investment in human capital and a renewed focus on productivity, the UK could positively benefit from its ageing population. To fully realise these benefits, it’s crucial to enhance financial literacy through expanded education and training on savings, pensions, and retirement planning, particularly for young people. This is a key strategy in planning for the inevitable consequences of the demographic transition.
Additionally, the demographic transition offers more opportunities for cultural experiences, travel, and access to open spaces, which can help offset the negative aspects of ageing. Without greater attention to all these issues, however, the downsides will likely worsen economic and social outcomes.