For the silver generation, this truly is a golden age. Two reports released in the last week indicate that pensioners have never had it better. The first, Tilney’s “The Cost of Tomorrow”, debunks the myth that supposedly frivolous twenty-somethings spend more on having fun than retirees, either in absolute terms or as a percentage of their overall outgoings. In fact, they spend just a fifth on having a good time, compared with the quarter spent by people aged 65 to 74.
The second report, “As Time Goes By” by the Resolution Foundation, finds that the average income of pensioners is now higher than that of their working age descendants for the first time in history.
It is well-known that a savings crisis awaits working age people in retirement. They have unrealistic expectations about what they’ll be able to afford based on the meagre size of their pension savings, and are unable to save as much as they’d like.
Using data from the Office for National Statistics’s latest Family Spending Survey, Tilney finds that a typical retiree spends £420,000 in total – £26,000 every year between the ages of 65 and 74, and £16,000 thereafter. Non-retirees estimate they’ll need just £16,456 a year on average, underestimating the real total figure by nearly £100,000. The wealthiest quarter of households spend £43,300 for the first decade and £25,500 after the age of 75.
Non-retirees underestimate how their aspirations might change once they have more time on their hands
The Tilney research goes further, to demonstrate the extent to which current non-retirees actually underestimate how their aspirations might change once they suddenly have much more time on their hands.
The survey shows that current workers may be underestimating how often they will want to go on holiday and change their car in retirement. Only 27 per cent of non-retirees said they would want to regularly eat at restaurants, go to galleries, the theatre and the cinema, versus 37 per cent of currently retired people.
Of course, we could take this as an encouraging sign. Maybe today’s working age people are finally getting realistic about what they’ll be able to afford once they hang up their boots. But it seems more likely that non-retirees are simply underestimating the quality of life which will satisfy them, and could portend higher levels of retirement poverty.
Either way, today’s working age population, particularly those in their 20s and 30s, are going to have to adjust their expectations for their later years.
The asset-rich baby boomers reaching retirement today have benefitted from a peculiar confluence of generous economic conditions which their children won’t.
They bought their homes cheap and have stayed put as demand for UK property outstripped supply, fuelled by excess liquidity from central banks seeking to stimulate growth in the wake of the financial crisis. Last month, the Office for National Statistics said that the median income for retired households rose in 2016 to 13 per cent above the levels of 2007-08. In contrast, the incomes of non-retired households have fallen by 1.2 per cent.
And it is their children who are footing the bill for the gold-plated final salary pensions which were offered to many baby boomers, and which have since been closed.
Employers pay an annual income to retired employees based on the size of their pre-retirement salary until they die, and in recent years, payouts to pensioners have come at the expense of pay rises to current employees. The Resolution Foundation finds that by their late 20s, millennials are now earning less than baby boomers did at their age. And as they retire, baby boomers are now benefitting from generous state benefits like the “triple lock”, which sees the level of state pensions rise with incomes, inflation or 2.5 per cent, whichever is highest.
The asset-rich baby boomers reaching retirement today have benefitted from a peculiar confluence of generous economic conditions
At the other end of the career ladder, young people are having to save into defined contribution pensions – which require workers to fork out from their own pay during their careers.
So what can the younger generation do to close the pensions gap?
A new reality
There is sadly no quick fix. Even if real incomes rose at the pace they did over the baby boomers’ careers, unsustainable final salary pensions are unlikely to make a comeback.
Young people will simply have to save more of their income each month. By starting to save from an early age into a portfolio of higher risk assets such as stocks and more exotic investments, the benefits of compounding can significantly reduce the amount you need to save later in your career, when incomes tend to peak and saving can seem like less of an inconvenience.
Figures by Fidelity show that investing the amount spent on an unused gym membership – say £80 – over 20 years would grow a savings pot of £19,200 to £28,316 after fees and assuming annual growth of 5 per cent. Add in pension tax relief – a top-up by the government of 40 and 45 per cent for higher and additional rate taxpayers on eligible contributions – and the benefits are substantial.
Passing wealth on in a tax-efficient way is also going to be crucial. In November, Brewin Dolphin estimated that the UK’s over-65s are sitting on housing wealth worth £1.3 trillion. Rules to allow a couple to pass on assets worth £1m free from inheritance tax to their children and grandchildren from 2020-21 will certainly help.
Working in retirement to supplement your income will also become the norm. The Resolution Foundation points out that part of the reason retirees’ income has reached such high levels is because they are already embracing post-retirement employment. Nearly one in five pensioner families live in a working household today, up from one in eight in the early noughties.
Non-retirees are beginning to wake up to this new reality. A study by Old Mutual Wealth and YouGov, published last year, showed that temporary and flexible work are increasingly being used as ways to fund retirement, with 30 per cent of respondents saying they expect to have to get a job to help provide towards their future retirement income.