The FCA recently published a discussion paper on the different issues being faced by Millennials, Generation X and Baby Boomers. I was particularly interested in the section on Baby Boomers.
A Baby Boomer is someone who was born between 1946 and 1965. That is those aged between 54 and 73. If you are involved in later life planning it’s the ages where most of your customers will come from.
The high-level characteristics of a Baby Boomer used by the FCA is that they have benefited from increasing asset values and defined benefit pensions yet face the challenges of coping with pensions freedoms and using their housing wealth to finance their retirement.
For many the mention of using housing wealth to finance retirement may come as a surprise. They should look at the latest Pension Income Series published by the Department of Work and Pensions (DWP) at the end of March. This provides insightful data on the incomes of pensioner households. A pensioner household is a household where one of its members are over State pension age.
Not all pensioner households will include a Baby Boomer. However, the two key aspects of the FCA high-level description of a Baby Boomer will extend to many of those over age 73. There are 8.7 million pensioner households in the UK of which 54% contain one person. Highlights of the latest income series are:
- In the year up to April 2018 pensioner income reduced on average by over 4% or around £13 a week. Single pensioners suffered a larger reduction in retirement income than pensioner couples.
- Two-thirds of pensioner households are in receipt of a private pension. That is either an occupational or personal pension scheme.
- One-third of those in receipt of Occupational Pensions receive less than £90 a week or £4,680 a year – the median being £166 per week £8,632 a year.
- Two-thirds of those who have personal pensions receive less than £90 a week with the median being £53 a week.
- Where the household became a pensioner household within the last five years, 6% have no income other than State benefits. In single pensioner households this increases to 27%.
- The average pensioner household income is £533 a week (£27,716 per annum).
- 17% of pensioner households are in receipt of earnings. The median being £339 a week (£17,628 a year). Remember this data includes pensioner household incomes where one of a pensioner couple is under State pension age.
- Among couples where the eldest was within five years of State pension age this increased to 41% but the median income in this group was not much higher at £353 a week.
The low level of private pension income confirms why so many say they need to look at their housing wealth to provide the retirement income they need. This is unlikely to change for many years.
Looking at individual pensioners, 49% have income in excess of the median for the population as a whole. This is based upon net income after housing costs. Using HMRC statistics, the median income for the population as a whole before tax is close to £24k a year (£461 a week). On the face of it nearly 50% of pensioner households would be considered to be well off.
There are, as would be expected, regional differences in pensioner income. The South East has the highest average incomes for pensioner couples being 13% ahead of the median for the UK as a whole. For pensioner couples, Wales and London fare worse. Both being around 9% below the median amount. For single pensioners London is the poorest region being 11% behind the median.
The regional variations are based on three-year average net income after housing costs. I had expected high rents in London would lower the incomes of London pensioners. However, before housing costs, the amounts do not vary that much indicating that London has a higher proportion of poor pensioners than other regions.
That said, housing costs do make more of a difference to single pensioners than couples. They reduce the median income for a single person by £43 a week compared with £28 a week for a couple. In London the figures are much greater – £78 a week compared with £38 a week.
This data illustrates that there is just as wide a variation in incomes in pensioner households as there are in working age households. For many their private pension income is insufficient. We know that 70% of pensioners are homeowners. How that statistic overlays this data is unclear. How many of the pensioner households with no income, other than their State pension, own their house?
There are many pensioner households that are just about managing or worse. A large number of these will be homeowners. As the FCA imply in their generational analysis, for many baby boomers and those who are older, use of housing wealth in retirement is going to be just as important as the use of pension wealth.
Bob Champion is chairman of the Air Later Life Academy