Pensioner Wealth: You’ve Never Had It So Good – But How Long Will It Last?

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Pensioners in the UK find themselves in an enviable position these days. Unlike most other parts of society, they have seen their income rise over the past generation.

Back in 1979, pensioners made up almost half (43%) of those in the lowest income bracket, according to the Office for National Statistics. As of 2013/2014 statistics, that figure has fallen to a little over one in 10 (13%).

Their income has also begun to close the gap on earnings in general. After allowing for housing costs, pensioners are now only earning 7% less than the working population. (Aegon, Golden Age of Retirement report, 2016) 

The growth of income 

The reasons for this are simple. From the 1960s, many employees were members of defined benefit (DB or final salary) pension schemes. These schemes offered a proportion of salary as an income in retirement.

As a result, many baby boomers have retired – and will retire – with sizeable amounts of DB pension.

Since the year 2000, occupational pension income has made a greater contribution to the weekly income of pensioner households. In the 15 years to 2015, it increased by more than half, from £96 to £146 a week. (Aegon, Golden Age of Retirement report, 2016) 

Benefit income – all social security payments including state pension – has also increased by about 30% since 2000. (Aegon Retirement Income Report) Much of this is due to the application of the triple lock – a mechanism that ensures state pensions will increase in line with inflation, earnings growth or at a rate of 2.5% a year. The introduction of the flat-rate pension in April this year will also contribute to higher pensioner income levels.

Not all beer and skittles

While this is all good news for pensioners, this situation is fragile and could reverse very rapidly. The positive impact of DB is already in decline as employers close plans. They are simply too expensive to maintain as stricter regulation and volatile investment markets have made DB plans increasingly expensive to run. 

Increased longevity has also been a major factor on the closure of DB plans. Pensioners can now spend 20 years or more in retirement – far longer than their parents' generation. While this is a wonderful development for individuals, who can enjoy a longer and generally healthier life, such an improvement was not foreseen when these plans were created. Employers are therefore committed to paying pensions for far longer and places a financial strain on the plan and the employer standing behind it.  

These have largely been replaced with defined contribution (DC) schemes, and are not backed by an employer promise. Instead, they rely on investment performance and the amount an individual pays in.

State pensions may not be as generous in the future, either. The government has not committed to the triple lock beyond 2020 and there are those who campaign for pensioner rights who say it is too expensive to maintain. 

The state retirement age is already moving back from 65 towards 70. As a result, people will have to rely on their private pension plans, or work later than they had planned. 

According to The Pensions Regulator, more than six million UK workers now save into a workplace pension as a result of auto-enrolment (AE). However, the issue lies in the voluntary contribution, as many contribute the bare minimum. If savers don’t significantly increase contributions, they will find themselves much worse off than today’s pensioner

Mixed blessings

Though DC pensions are unlikely to replace the benefits derived from DB, it’s not all doom and gloom. Retirement is not what it used to be –in fact, it doesn’t necessarily mean the end of work. 

People are not only living longer but are also fitter in older age. Many will choose to continue working and gently ease themselves into retirement.

Savers have greater control over their retirement saving since the introduction of the freedom and choice reforms. These allow individuals to access their pensions from the age of 55, or not spend them at all and pass them on to a loved one.

With choice comes greater responsibility

The greatest fear that every pensioner has is that they will run out of money. Yet increasingly they will not be able to rely on income secured from DB plans. Fewer savers are choosing to guarantee income with annuity products, as they consider the historically low rates to offer poor value. 

If we are not to see this ‘golden age’ of retirement recede, savers must take a realistic look at their needs and consider how they are going to afford it. 

Retirement is a time to look forward to, much like a holiday. Just like a holiday, it needs to be planned and paid for. 

Unless saving becomes more consistent and proactive, this ‘golden age’ will be consigned to the history books.