Grey wealth might well exist, but uncertainty means the stashed cash may not be spendable says Bill Jamieson
From pensioner poverty to pensioner wealth: how the pendulum has swung dramatically in just a few years.
This week’s Resolution Foundation report finds that typical pensioner incomes after housing costs now outstrip those of working age people. Pensioner households are £20 a week better off than working age households, but were £70 a week worse off in 2001.
Good news, surely: pensioners are now disproportionately unlikely to be in poverty – and many notably well off. What a turnaround from the ubiquitous headlines of yesteryear. For most of the past 40 years the personal finance sections of newspapers were filled with reports of dire pension returns, savings ravaged by inflation, pensioner misery, and the urgent need to step up those retirement savings to avoid penury in old age. I know. I remember writing many of them.
But this positive ‘reversal of fortune’ for pensioners has not been welcomed with entirely open arms. Rather, it is guiltily compared to the plight of young families struggling to buy their first home. Any relief over pensioners being better off than was the case ten years ago is lost amid earnest concerns over “intergenerational inequality”.
Now the talk is of curbing tax relief for pension saving and limiting increases in the state pension. Lord David Willetts, an executive chair of the Resolution Foundation and former Conservative minister, says that the “triple-lock” pension policy of successive governments - guaranteeing pensions rise by the same as average earnings, the consumer price index, or 2.5 per cent, whichever is the highest - should be reviewed.
The triple-lock, he says, “is a very powerful ratchet pushing up pensions at a time when incomes of the less affluent half of working households are barely rising at all.”
Yet some caveats need to be entered on the picture of ‘big spend’ pensioners. Statistical wealth is not the same as spendable cash. The big driver is longevity – and the need for people to make provision for a lengthier period in retirement than their parents’ generation. And what comes with growing older is a greater apprehension as to what the future might hold – and a sensible caution about spending that nest-egg.
Lord Willetts may feel blasé about scrapping the state pension triple lock – do we really need all that machinery of inflation protection? That’s an easy proposal to make when inflation had fallen to near zero.
But how ironic the Resolution Foundation report has come out in the same week as news that inflation has risen to 1.8 per cent. And by most accounts it will be heading towards three per cent by the end of the year. Fixed interest savings provide little protection against this.
There’s another reason why retirees might not feel as much in the money as the figures suggest. Much of that pensioner wealth pool is in the form of bricks and mortar – the family home.
Now that has certainly risen in value over the years. But it’s the same family home from which many now want to ‘downsize’. There are plenty of older people who wish to do so. Saga research shows that seven in ten over 50s would like to ‘right size’ in retirement to smaller homes or age-related developments. They are put off, however, by the cost of moving and the lack of suitable property.
According to pensions giant Legal & General, 3.3 million last-time buyers said they would like to downsize, and while a third of older homeowners have considered downsizing in the last five years, only 7 per cent actually did. L&G believes this is due to the prohibitive cost of downsizing and a lack of suitable properties, and has called on the government to address these issues.
The L&BTT charge on a £345,000 family home in Scotland is now £7,850 – enough to curb the enthusiasm of a prospective buyer. As for costs, tune into any of those TV interior make-over programmes and watch the bashful couples squirm when asked how much it all cost. “We started with a budget of £10,000,” they coyly begin, “but, my, how it just grew.” A 50 per cent overshoot is not uncommon.
Meanwhile, changing demand pressures have resulted in the price differential narrowing between a four-bedroom family home and a smaller two-bedroom property. Many fear that a costly move would not only fail to yield the extra spendable cash they might then enjoy but also eat into the inheritance for their children. And that is a major psychological constraint on the great pensioner splash-out.
So the rise in incomes and wealth has by no means brought a boom time for all pensioners. As the Resolution Foundation report points out, most have found that their personal situation “changes little from year to year”. While typical incomes across the pensioner population have grown by more than 30 per cent since 2001, the typical income of someone who turned 65 in that year was only seven per cent higher by 2014.
And the growth in typical pensioner incomes since the 2000s is not all due to the state pension triple lock. It owes much more to the spread of occupational pensions, the growth in the numbers of over 65s still working, and home ownership as well as increased state benefits.
Arguably the most potent of these has been the rise in the numbers of over 65s still working: the total here has now climbed to 1.2 million or 10.8 per cent of this age category. Many feel the need to continue working to cushion the drop in income after leaving previous full-time employment. Others feel themselves still active and capable of working and do not want to lose the social contact aspects that come with employment. Meanwhile the switch away from manual occupations and greater longevity has increasingly left the ‘retire-at-65’ rule an anachronism.
Even so, have the over 65s not ‘got it all’? And if so, why do we now need to keep saving? The Foundation warns that future generations of pensioners cannot assume that they will benefit from further gains from these income sources. And research by Bank of Scotland’s How Scotland Lives research found that of those Scots saving for the long term, providing a more secure future was the main reason for doing so (55 per cent), closely followed by the desire to provide a more comfortable retirement (47 per cent).
Meanwhile the government has announced plans to pay incentives to older people to persuade them to downsize into a smaller property. It could be a lifeline for those millions of pensioners who want to move out of rambling and expensive family homes - to free up cash and cut the cost of maintaining their home.
Given that there is approximately £820 billion in last-time buyers housing wealth in the UK - a figure expected to reach £1.2 trillion by 2020 – such a push would help all age groups. If it’s intergenerational inequality you want to tackle, here’s as good a place as any to start.