British Retirees Are Richer than Ever, But That Might Change7th February 2016
While the British economy has been doing quite well in the recent years, critics often point out that vast majority of the population have not enjoyed much of the prosperity. Especially the young have suffered from sluggish wage growth, less job security and sky-high housing prices. That said, one group which has done particularly well is the retirees.
Average Retirement Income
According to a research report by Canada Life, average income of British retired households has increased by 127% (from £10,427 to £23,695) in the last 20 years, significantly outpacing the average income of working age population (up 99% in the same period). This trend has become even stronger after the financial crisis, as retirees’ incomes have grown by almost a third since 2008, more than two times faster than non-retiree incomes (13.6%) and comfortably beating inflation (18%).
Of course, the average income of non-retired households is still much higher in absolute terms (£47,555 in 2015), but the gap has narrowed considerably (from 2.3x in 1995 to 2.0x in 2015). Furthermore, retired households tend to be smaller and have generally lower living costs than those of working age. They also pay much lower taxes. When these factors are taken into consideration, the gap in disposable income between retired and non-retired households is just 32%, smallest ever. In other words, retired people have been gaining financial power relative to working age population.
State and Private Pensions Driving the Growth
Pensions have been the key drivers of retirement income growth in the last 20 years. Average income from private pensions has tripled (up 201%) since 1995, while average State Pension has increased by 148%. These two remain the dominant sources of retired household incomes with approximately equal share, complemented by other (non-pension) private investments, other state benefits and other sources.
It is expected that the above mentioned trends will continue for at least several years. Retirees, as a group, will see their incomes grow further – something that is much harder to predict for the working age population. Among other factors, the triple lock on the State Pension will provide support (the triple lock means that every year the State Pension rises by the highest of inflation, earnings growth or 2.5%).
Today’s retirees are enjoying the highest living standards ever, both in absolute terms and relative to the working age population. Unfortunately, the situation may turn out much more difficult for those who will retire in the future. It is feared that given today’s economic circumstances, the current working age population might not be able to build sufficient pension pots and wealth to match their parents’ living standards in retirement.
Challenges for Future Retirees
There are many reasons why building wealth and preparing for retirement is more difficult than it was for the previous generation. The most significant are the following:
- Job market. Slow wage growth, job insecurity, many jobs threatened by global competition, outsourcing and technology. Not everyone can adapt well to the new economy.
- High cost of living. Combined with the above, it simply means there is less money left to save every month.
- High property prices, which may lead to lower rate of homeownership and thereby higher living costs or financial difficulties for future retirees.
- The ongoing shift from final salary (defined benefit) to defined contribution pension schemes.
- The Government becoming less generous with pension tax allowances, which means that a bigger portion of your retirement savings may end up with HMRC in the future.
- Record low interest rates. They have been near zero for several years and no one can tell if or when interest rates will rise to levels seen in the previous decades. When interest rates are low, you may need to look at riskier investments to generate decent returns.
In spite of the long list above, it is not all doom and gloom for future retirees. For example, besides cutting allowances, the Government has also introduced new pension freedoms, which may open up new retirement planning options. It is a double-edged sword though – it is essential that you (or your adviser) understand the new regulations and all the risks and opportunities they represent.
While the statistics show that retirees, as a group, are doing well and the predictions warn that it might be more difficult for future retirees, the retired population is obviously far from homogeneous. Some of today’s retirees are struggling, while others enjoy a more than comfortable income. Similarly, some of future retirees will lag behind, while others will thrive. Becoming the latter requires careful preparation and a well-thought-out strategy (while being ready to adjust the strategy as circumstances inevitably change in the future).