Homeowning pensioners splurge early in retirement

Pensioners who own their own home are spending big in an effort to enjoy the early years of their retirement, new research suggests, before reigning it in as they get older. Meanwhile, renters spend more consistently throughout their golden years.

Homeowners spend an average £346 per head each week between the ages of 65-69, according to a new report from former pensions minister Sir Steve Webb and the University of Bath. This drops to £248 by the time they turn 85 – a decrease of almost 30%.

Meanwhile, renters take a different approach to managing their money in retirement. The average social tenant only pares back their spending by around 3% over the same period, spending £233 per week at the start of retirement and £225 by the time they turn 85.

The drop in spending among homeowners is largely driven by them cutting back on luxuries. Homeowners in their mid to late-sixties are spending over £200 per week on non-essentials, whereas those in their mid-eighties are spending less than £150 per week.

“This data provides startling evidence of the diversity of pensioner preferences and in particular that homeowners strongly prefer to spend more of their retirement wealth in the earlier part of their retirement, whereas renters may want and need a steadier income,” said Webb.

For this reason, pension providers need to offer tailored solutions that support retirees based on their unique lifestyle choices and needs, he suggests.

“This research underlines the importance of understanding how pensioner spending changes across cohorts. In particular, pensioners are not a homogenous group and analysis by housing tenure highlights large differences in the spending levels and behaviour exhibited by each group,” added Dr Ricky Kannabar, senior lecturer at the University of Bath.

Kannabar says further research is required to adequately inform the design of pension drawdown products.

Defined contribution (DC) pensions offer flexibility but also uncertainty

Most people saving into a pension today will have a defined contribution plan. While these offer greater flexibility than the older defined benefit plans, they also come with greater uncertainty, as the value of your pot depends on how your investments perform.

Those with a DC pension also have several decisions to make when they reach retirement, such as whether to buy a guaranteed income in the form of an annuity or keep their pot invested, accessing some cash through income drawdown.

Webb points out that, as pot sizes get bigger, fewer people will cash out in full and more will need to manage the pot over the course of their retirement, potentially for decades. This is very difficult to do.

The government is aware of the challenges and is planning to introduce new legislation through its Pension Schemes Bill. This will require schemes to offer retirement products, including a default retirement solution.

The problem is that there is currently very little information about how pensioners want to approach their retirement spending, as Webb points out. Some may want money to enjoy travel or new hobbies at the start of retirement, while others may want to save their retirement savings for potential care costs in later life.

The cost of a comfortable retirement – how much will you need?

The cost of a comfortable retirement has soared in recent years. The latest figures from the Pensions and Lifetime Savings Association (PLSA) show that a single person needs a retirement income of £43,100 per year, while a couple needs £59,000.

A moderate retirement costs £31,300 or £43,100, depending on whether you are single or in a couple, while a basic retirement costs £14,400 or £22,400.

These figures do not include housing costs, so those who are still paying off a mortgage or renting in retirement could find themselves paying significantly more. It is also worth pointing out that a basic retirement does not include the cost of running a car, nor does it allow for foreign travel.

One of the best ways to boost your retirement prospects is to increase your pension contributions while you are still working, if you can. Workers benefit from valuable tax relief from the government, as well as top-ups from their employer.

Those who have already reached pension age should develop a plan for how to manage their money in retirement. Key decisions include:

• How much money to take each year: Some suggest annual withdrawals of 4% adjusted each year for inflation, however this approach is fairly inflexible and doesn’t allow for the different lifestyle choices pensioners may choose to make at different stages of their retirement.
• Whether to opt for drawdown or an annuity: An annuity offers greater certainty and annuity rates currently look attractive, however drawdown offers the prospect of further investment growth. A hybrid approach is a popular route with many savers.
• How to access your tax-free cash: Savers are entitled to take up to 25% of their pension as tax-free cash. They can either take this as a lump sum or in instalments. Again, leaving a portion invested could allow it to benefit from further investment growth.

Finally, retirees should not overlook the important role of the state pension. This makes up at least 50 percent of total retirement income for savers with private pension assets worth less than £240,000.