Pensioner incomes double over two decades but will the next generation be as well off?

19th September 2016

Pensioner incomes have almost doubled over two decades, rising from £155 per week in 1995 to £297 in 20151 according to an analysis by pension firm Aegon.

While the gap between pensioner and worker incomes has closed and there is just a 7% difference today, the report ‘The Golden Age of Retirement – Does rising pensioner wealth mask future problems?’ calls into question whether the next generations of pensioners will be as well off.

Pensions have benefited from

Today’s workforce is worried about retirement security

Those approaching retirement are concerned about the challenge facing them. Well over half (57%) of people aged between 50 and 64 are worried they will run out of money during retirement. This compares to just 37% of over 65 year olds.

Faced with high living costs, mortgage repayments and family commitments, 92% of those aged 45-49 and 89% of those aged 50-65 reported barriers to them being able to save for retirement, despite these historically often being peak ‘disposable income’ earning years.

One of the biggest risks to future retirement income is the uncertainty over increases to the state pension. Almost half of pensioners’ household income, some £214, comes from state benefits, making it a financial lifeline for much of the population. Aegon’s research suggests that a third (36%) of people aged 50-64 are worried that the state pension will be less generous in future.

Can pensioner wealth be maintained?

Current workers’ concerns stem to a large extent from radical changes to workplace pension provision in recent years with very few private sector employees still building DB pensions that guarantee a proportion of final earnings for life. These are being replaced with less generous defined contribution schemes which place investment risk and decision making on the individual.

While over 6 million people are now saving into a defined contribution (DC) pension as a result of auto-enrolment, these pensions are seldom as generous as the DB schemes they replace. Worryingly, many of those recently auto-enrolled are seeing only 2% of their pay being invested which will come nowhere near making up the hole made by the absence of DB.

On top of this, recent generous increases to state pensions are being challenged despite state pensions remaining the bedrock of most people’s income in retirement. Finally, rising housing costs mean people are re-paying mortgages at a later age6, which prevents them fully focusing on retirement goals.

Steven Cameron, pension director at Aegon said: “The rise in pensioner wealth over the last few decades has been remarkably positive, with retirees now enjoying income levels after housing costs almost equal to those of working age. This is largely thanks to generous DB schemes, recent above inflation increases in state pensions, and a growing cultural acceptance of working later in life.

“But the question is whether we have reached a tipping point, with gold-plated DB pension schemes largely been phased out, and the future of generous state pension increases also called into question. Those approaching retirement could be setting false expectations if they want a similar level of comfort in later life to that of their parents or recently retired friends.

“Auto-enrolment is an important first step, but won’t be enough to replace the generous DB retirement incomes historically provided by employers and there needs to be more of a focus on getting people engaged with their savings.

“It’s also important we stop looking at retirement in black and white terms, with individuals either in work or retired and as a society find roles for older workers and encourage flexible working from 65 and beyond for those in good health too. While there are many challenges ahead, the rise of pensioner wealth has been remarkable and the good news is people are living and staying active longer, which will provides an opportunity to rethink traditional views of retirement.”

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