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‘Thrifty’ pensioners hold onto wealth in retirement

Written by: Paloma Kubiak
Pensioners are cautious when it comes to spending their wealth, opting to keep money back for care home needs, or to leave an inheritance to younger generations.

According to a report by the Institute for Fiscal Studies (IFS), people, on average, draw down just 31% of their net financial wealth between the ages of 70 and 90.

It suggests that most wealth held by current retirees will be bequeathed on their death, rather than spent during retirement.

The report found people aged 55-64 (on the cusp of retirement) in 2014/15 had an average £390,000 in non-pension wealth.

The majority of this wealth (60%) was held in owner-occupied housing, with 22% held in financial assets such as savings, and ISAs, 11% is in other property and 7% in business assets, land and antiques.

The research into the gifting habits of retirees revealed that married people nearly always bequeath to their spouse only and that the surviving spouse is the one who gifts to children.

The think tank believes the pattern of wealth use in retirement may change in the future as of those in their 50s, 30% expect to use savings, 30% expect to use their primary housing and 10% expect to use other property to finance their retirement.

It also found that second home ownership at older ages is increasingly common with one in seven of those born between 1950-54 owning another property, compared to one-in-10 of those born 1940-44 and one-in-20 of those born a decade earlier.

As such, the IFS said: “Given this higher baseline level of ownership, selling to fund retirement expenditures could be more common in future”.

Underspending in retirement

Rowena Crawford, an associate director at IFS and author of the report, said: “Older people do not draw on their wealth much during retirement. The majority of homeowners do not move or access their housing wealth, and even financial wealth is drawn down only slowly. This means that most wealth held by retired people is likely to be bequeathed to future generations, rather than spent.

“This will have implications for the level and distribution of resources among current working age individuals, particularly those with wealthy parents and few siblings. Given the increased freedom people now have over how they spend their pension wealth in retirement, carefully monitoring how the use of wealth evolves in future will be important, both for the living standards of the retirees themselves, and also for younger generations.”

Tom Selby, senior analyst at AJ Bell, added that retirees’ thrift can be sensible in some circumstances, particularly where people have relatively small savings pots and choose to hold onto the money to cover any unexpected bills.

“Equally, others will be leaving significant assets untouched in case they need to pay for long-term care as they grow older, while some will simply prefer to pass assets on to loved ones rather than spend them while alive.

“That said, it is likely some of these people are overly worried about running out of money during retirement and are underspending as a result. Such reckless conservatism has been identified as a problem in the Australian pension system and may well prove to be a central issue for UK policymakers to address following the introduction of the pension freedoms in 2015.”

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