People’s income needs in retirement don’t fall away with age (IFS)

Thanks to David Sturrock, Carl Emmerson and Carolyn Jones for their comments on the IFS’ excellent research  funded by IRS Savings consortium, which includes the ABI ACA, Canada Life, IA, MaPS, PLSA

Particular thanks to Heidi Karjalainen who together with Rowena Crawford was. I understand  principally responsible for this report. Heidi presented the bulk of the findings the IFS’ summary of which are below. If you have an hour over the weekend- watch the youtube.

This is the IFS’ only summary of the reports key findings.

  1. On average, retirees’ total household spending per person remains relatively constant in real terms through retirement, increasing slightly at ages up to around age 80 and remaining flat or falling thereafter. For example, for those born in 1939–43, spending at age 67 was on average £245 per person per week, rising to £263 per person per week at age 75, a real (in CPI-adjusted terms) increase of 7%, or just under 1% per year. For those born in 1924–28, spending fell from £197 per person per week at age 82 to £185 at age 88, a fall of 6%, or around 1% per year.
  2. By contrast, average household income per person for retirees aged 62 and older is more clearly increasing in real (CPI-adjusted) terms as people age. This is driven by private pension incomes increasing faster than the Consumer Prices Index (CPI) and by increasing numbers of people receiving the state pension and disability benefits as they age.
  3. In conjunction with relatively constant spending, increasing incomes mean that more people save, and save at higher rates, as they age. For example, for those born in 1939–43, almost six-in-ten (59%) saved at age 67 but this rose to almost seven-in-ten (69%) by age 75. Over the same ages, the share of income saved by that group rose from 2% to 15%.
  4. The composition of spending changes as people age, with per-person spending on food inside the home and on motoring falling steadily, spending on holidays increasing up to age 80 and then decreasing, and spending on household services (which includes spending on home help and domestic cleaning) and household bills increasing in later years of retirement.
  5. There are differences in spending patterns across different types of households. Households with above-average incomes for their age and birth cohort have an increasing profile of spending in their 60s and 70s (for example, increasing by 7% between ages 67 and 75 for the 1939–43 birth cohort), with spending falling slightly for those in their 80s. On the other hand, those with incomes below median have a slightly declining age profile of spending in their 60s (with the 1939–43 birth cohort seeing a fall of 1% between ages 67 and 75) and spending remains flat at older ages.
  6. These results suggest that, on average, in order to have an income profile that would match the age profile of spending through retirement seen among earlier cohorts, people should aim for a total income profile that is roughly constant in real (CPI-adjusted) terms through retirement. Given that policy is for the state pension to rise faster than prices over time, this suggests that, at least among current retirees, a declining profile of income from private sources might, on average, be appropriate – and particularly so for those with lower incomes, who are more reliant on the state pension in retirement. However, for those largely reliant on private pension income, a non-index-linked annuity would leave them more exposed to inflation and they may not be able to maintain the level of spending they would like in retirement.
  7. The death of one member of a couple will affect per-person spending of the surviving partner as many shared expenditures, such as housing costs, will not fall when a partner dies. When thinking about future spending needs, households thus need to consider how changes in circumstances, in particular the death of a partner, will affect income and spending in order to ensure that resources are available to fund increases in per-person spending. Future retirees, who are less likely to have occupational or state pensions with a survivor’s benefit, will have to decide how to take this into account when deciding speed of drawdowns and whether to buy an annuity that provides survivor’s benefits.
  8. If the spending patterns of current retirees are a good guide to how people in the future will want to spend, current savers might be best advised not to plan their retirement saving on the basis that their overall spending will fall sharply during retirement. Furthermore, we find that later-born generations spend more at the start of retirement on categories such as leisure services and holidays (which make up 7% of total spending at age 65 for the 1924–28 birth cohort compared with 11% for the 1944–48 birth cohort), which tend to increase with age, and less on categories such as food inside the home, which tend to decrease with age. This might mean that the spending of younger, and future, generations of retirees could grow more strongly with age than is the case for current retirees.

There were three issues discussed following the presentation

1.The impact of losing your partner

Many people have assumed that people’s needs in later life require less income and that the cost of living decreases with age. This does not appear to be born out by this research which suggests that both in discretionary spend (such as holidays) and in spending on essentials (such as heating and eating), costs remain static. Indeed the biggest financial issue in later age is the loss of one of the household , where income falls but spending (on housing particularly) continues.

One of the complaints I had when on a recent holiday was the single room supplements for widows and widowers travelling with us. I spoke about this to two elderly (merry) widows over 85 who confirmed that there home spending hadn’t fallen much since the death of their husbands – but their income had roughly halved.

Recent evidence that the over 80s enjoy holidays (and alcohol)!

2. Inheritable wealth (and the impact of healthcare costs)

Maybe out of habitual frugality but (the IFS reckon) mainly out of the success of private (mainly DB) pensions, the current generation of pensioners are still saving through retirement. This is encouraging, fear of running out may account for some of this, but there appears to be some instinct to provide for future generations. Future generations may well need this generosity

The report does not comment on the likely pensions of generations still in their forties and fifties but all the indications are that on a money in/money out calculation, those private pensions that form such a big part of today’s pensioner incomes will be reduced. (Nor does the report deal with the impact on inheritable wealth of healthcare for those in later years).

It was noticeable how popular were questions from the online audience with regards to the impact of care on wealth and spending.  David Sturrock pointed out that the Department of Health estimate that one in eight elderly households face costs of care in excess of £100,000. Surely the IFS are right to regard wealth preservation as a distinct and separate issue that understandably troubles a younger audience.

3. Income from private pensions.

While not commenting on its adequacy , the IFS made in clear that the new normal is drawdown and that means people designing their own income profile in retirement.

horizontal axis = number of pension pots (apologies for poor quality screenshot)

Infact, drawdown (yellow) and annuity purchase (blue) is only really happening for those with larger pots. We know that most AE retirement saving is being treated as windfall cash and being banked (green box). AE is a savings success, it is not (yet) a pension success.

But as average balances increase , so we should be seeing more yellow and blue and it’s that that insurers should be planning for. I say insurers as I am convinced that the vast bulk of drawdown will eventually convert to either conventional later-life annuities (the Steve Webb/LCP model) or invested annuities incorporating longevity pooling. (a model that is emerging in Australia with pressure from the Retirement Income Review/Covenant).

This report should accelerate  a return to lifetime retirement incomes and the dumping of the fallacious theory that people stop spending when they get into their 70s. “Wage for Life” solutions are being enjoyed by many senior citizens in the UK (even if the take up of eligible state benefits such as pension credit and the citizens pension are too low).

A sobering conclusion

To suppose that the current situation is satisfactory is silly. We heard that a quarter of the population over 66 has no plan for what will happen to their income for the rest of their lives.

It is crucial that we use these insights to build retirement plans for these people.


About henry tapper

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