Couples retiring now have ‘more income and wealth than necessary’

http://www.theguardian.com/money/2014/sep/09/couples-retiring-wealth-ifs

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Britain’s retiring workers have never had it so good, according to an analysis by the Institute of Fiscal Studies which shows that the vast majority of couples born in the 1940s are maintaining their former living standards into retirement – and nearly a half enjoy a greater income in retirement than average real earnings.

The IFS research looked at the income and wealth of couples at retirement compared with their average earnings when they were 20- to 50-years-old. It found that 80% of couples born in the 1940s had an income at age 65 from both state and private pensions that was equal to two-thirds of their average working-life earnings, and that 40% enjoyed incomes higher than their average real working-life earnings.

Economists used two-thirds of former earnings as the benchmark for living standards in retirement as pensioners typically no longer have to support children, have generally paid off mortgages, and do not have to put aside any of their income to pay into a pension.

Once housing wealth is added to the equation – which reflects the huge gains made by people who bought their first home in the 1970s and 1980s – the IFS found that pensioners are awash with cash, suggesting that the “median surplus” wealth held by pensioners in excess of their needs is £220,000.

The IFS said: “92% of couples born in the 1940s have accumulated more wealth than the model suggests they need to maintain their standards of living into and through retirement. The surpluses are substantial on average – the median surplus being over £220,000, which would be enough to produce around £7,000 a year of income if used to buy an index-linked annuity. Even excluding housing wealth, 75% of couples have more wealth than the model suggests they need to maintain their standards of living. The median surplus is over £120,000.”

The figures will spark further debate on the generational divide between working and retired households. Pensioners have gained from the state pension “triple lock”, a government guarantee to increase the state pension every year by the higher of inflation, average earnings or a minimum of 2.5%, at a time when many workers are suffering flat or falling wages.

Cormac O’Dea, senior research economist at the IFS and one of the authors of the report, said: “The large majority of couples reaching state pension age in recent years have more wealth than necessary to maintain their standards of living into retirement. This is a cohort that has, as it has turned out, ended up saving more than they needed for retirement. The picture for future generations, however, may look quite different.”

Many of today’s retiring pensioners have benefited from both generous “final salary” related employer pension schemes, which offer guaranteed incomes in retirement of up to two-thirds of former income, and the startling rise in house prices over the past four decades. Younger workers are now being offered less generous “defined contribution” pension plans into which employers tend to pay less money and which are dependent on stock market returns. They are also having to save large deposits to pay for a home and take on mortgages on multiples of income far higher than previous generations.