Income and wealth in retirement

In recent years there have been many changes to the retirement landscape, and below we take a look at the factors outlined in the income and wealth in retirement report affecting the financial services market.

Retirement age, wealth and need

It is well documented that more people in the UK are reaching retirement age, and by 2031, numbers are expected to have hit 15 million. This means the market for retirement products will strengthen as more individuals convert pension savings and investments into income.

This segment of the population has a significant proportion of the overall wealth, which has mainly been driven by rising property values over the past 20 years.

However, this wealth is not evenly distributed. The population as a whole can be split into four distinct groups, each with different retirement needs:

• Low-income, state-dependent
  - who typically have no pension provision. They are likely to rely on the government and its representative bodies - instead of the life and pensions industry - for guidance on how to claim state benefits to ensure a minimum level of retirement income. They may also refer to community advice bureaus and charities.
• Mass market
  - who represent a significant proportion of the working population with incomes ranging from £20,000 to £39,000. The introduction of Personal Accounts and compulsory auto-enrolment as an additional pension savings vehicle may have a significant impact on their savings for retirement. Their demand for annuity advice is expected to grow in line with increasing defined contribution pension provisions. They may also need to consider alternative income means, such as equity release. The internet and employers provide a cost-effective channel through which financial services can be distributed to this group, where money guidance or guided sales are unlikely.
• Mass affluent
  - who earn £40,000 to £75,000, and typically have a variety of retirement income sources and use a variety of investment vehicles. They are likely to have multiple pensions, property and other savings as sources of retirement income. Many are willing to seek independent advice; however, some will rely upon their local bank or building society. They may also be well served by employers.
• High net worth consumers
  - who typically earn more than £75,000 and are likely to have sizeable pension funds and multiple sources of income that may continue to accumulate throughout retirement. They are likely to seek help from an independent financial adviser - often after their own research. This advice is likely to be ongoing throughout retirement to ensure they optimise different assets and in the most tax-efficient way.

UK population by age and wealth segment

Source: Deloittes' Wealth and Portfolio Choice 2007 Survey

Accumulation trends

Whilst the focus of this study is on decumulation, there have been clear accumulation trends over recent years that will affect the retirement income provisions of future generations. The most significant, being falling savings against increased consumer spending.

Consequent debt repayments, along with housing and living costs, are all outweighing saving for retirement. As a result people are not likely to receive the pension income they want or expect, and are more are likely to be dependent on state benefits or other accumulated assets. Alongside this, it is uncertain that house price growth of the past 20 years will be repeated. Put simply, people are not making enough provisions for their retirement.

These changes, combined with volatility in stock market returns, are putting pressure on state and company pensions. As more people reach state retirement age, it becomes more expensive to fund their pensions with less people in the workforce. Furthermore increasing life expectancy means the amount of money saved up by individuals has to last longer, so pension companies pay it out at a lower rate.

These factors have also contributed to employers closing entry to defined benefit schemes. The resulting switch to defined contribution schemes, which are dependent on the fortunes of financial markets, transfer investment risk from employers over to members and will have a significant effect on the retirement income of future generations.

It is hoped the introduction of Personal Accounts and compulsory auto-enrolment in 2012 will complement workplace pension arrangements, increase the number of people aware of the need to make their own pension provision and those actually saving for retirement.

UK Individual disposable income, consumption and savings ratio, 1988 - 2008

Source: Office for National Statistics (April 2009)