How to spend your pension -a further blog from Con Keating



If you haven’t read Con’s three previous blogs on this subject (which IMO form the most lucid contribution to the decumulation debate so far) – search Con Keating in the search box at the top of this page.


This blog responds to some of the many comments and questions that arose from my earlier blogs on decumulation.

The most frequent concern expressed was how difficult can it be to manage assets in such a way as not to run out of funds and to have a reasonable pension income. In fact, this is not a trivial exercise. As a 65 year-old man, my life expectation today is 19.1 years, but this estimate does not take account of the trend for increasing longevity, with that added, my life expectation becomes 21.9 years. This is the period that my drawdown pot needs to cover.

However, if I survive to age 70, then my life expectation has decreased only to 18.1 years. If I survive to age 80, then my life expectation has declined to 11.36 years, by age 90, my life expectation is still 6 years, and even at age 100, my life expectation is 2.5 years – even though, at that point, 35 years of retirement have elapsed. This is the calculus of Tantalus.

It would also mean that on death I would leave material bequests; at age 84, fifty percent of the initial pot, and even at age 100, sixteen percent[1]. Now add to this uncertainty over inflation and investment income and returns, and the complexity of the drawdown problem becomes evident. Perhaps the most important take-away here is that we will never be able to utilise all of our pension pots under drawdown, unless we become certain as to the timing of our deaths. By contrast, an insured arrangement, such as decumulation CDC, is equitable in the sense that half the members are winners and half losers, and comes without the stress and worry of self-provision.

On the time-scales here, and with the aggregate amounts involved, it is also unlikely that intergenerational transfers under bequests will continue to be favoured, as these do impair equality of opportunity and social mobility.

Many commentators on the previous blogs made the point that it is more correct to consider all wealth, not just the pension savings. This, of course, is true and I will address the most common form of other wealth, home ownership.

The first point to note is that home ownership at retirement is confined to about two thirds of the population and that some 12% of these have some outstanding mortgage debt – and around 25% of pensioners have other debt, such as credit cards, at retirement. It is interesting that in Australia where lump sum withdrawal at retirement has long been the norm, these lump sums are usually applied to repayment of these debts. However, flexi-mortgages that may be paid down or drawn upon are commonplace in Australia. Even without the rigidities introduced by home equity release or reverse mortgages, it is notable that UK pensioners do not downsize to anything like the extent that is warranted. There are emotional attachments to the family home for many.

It is certainly true that residential housing prices have performed spectacularly well in the post-war period and indeed even in the post financial crisis world they have increased by 3.5% annually, while wages have languished around 1.4%. Put another way, houses now cost 9.8 times median full time earnings. It is interesting to note that rental costs have increased even faster by some measures.

The central question here is whether this can be expected to continue over the term of retirements and clearly, it cannot. Already homes are unaffordable to most of our children, and social housing, for the many necessary ancillary workers in inner cities, and elsewhere, is as rare as the proverbial hen’s teeth.

The cause of this housing shortage is simple; for decades, we have needed to build 200,000 to 250,000 houses annually but have only built 100,000 to 150,000. Without impugning housing associations, this construction is almost exclusively private development, and of course, it is heavily constrained by planning laws and regulations. However, in the 1950s and 1960s we did build at a annual rate around 250,000 – the 100,000 difference is due to the decline in council house construction, and that was a matter of central government policy.

If we are ever to succeed in rebalancing the UK economy, away from the dependence upon London and the South East, greater involvement from municipalities, councils and regional authorities will be required, and the Chancellor’s recent return of responsibility for the business rate to them is an indicator of this. However, it is also clear that residential housing cannot be far behind.

But this takes us far from the practical issue of decumulation management – for most that is a question of how to create a permanent income from wealth owned. Continuing employment was suggested by many as a way of addressing the issues. That may work for some, but it should be noted that more than 80% of those who do continue to work after 65 are in fact long-service employees. In addition, less than 2% of economically inactive men aged 65+, and even fewer women, are ‘interested in work’. Quite apart from these issues, the scale of the problem of creating jobs is also daunting – with estimates ranging from 1.5 – 3.5 million – unlikely in extreme.

[1] These figures assume 2.5% annual inflation.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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