Last month, two reports were published that give some insights into the wealth of Britain and how the retirement income-planning market could develop.
First up, Retirement Advantage – using data from the Office for National Statistics (ONS) and the Nationwide Building Society – concluded that housing wealth held by the over-55’s now amounts to £375bn.
The over 55’s are significant because this is a key driver of the potential market for estate planning, investment for income following downsizing in retirement, equity release and care funding.
Secondly, the ONS itself published a ‘Wealth and Assets’ survey for the period July 2014 to June 2016. This is an important survey as it shows what constitutes the wealth of UK households and who owns it. The ONS breaks down wealth into the following categories:
- Net Property Wealth (homes and land owned in UK and abroad, less loans and mortgages secured on those properties);
- Net Financial Wealth (investments and savings, less credit cards loans and outstanding bills);
- Private Pension Wealth (occupational and private pensions but not state pensions); and
- Physical Wealth (household contents and possessions including works of art and vehicles).
Generally, the wealth of the nation has increased by 15% since the previous survey that covered July 2012 to June 2014. About 42% of national wealth is held in private pensions, what’s more it accounted for 53% of the growth in total wealth over the three-year period.
That said, we can’t begin to say we’ve solved the pension’s savings gap issue.
Annuities and pensions in payment, and defined benefit pension promises all have to be given a present value. Therefore, in a low-interest rate environment, low discount factors will provide a higher present value for wealth calculation purposes.
In future surveys we may see a reduction in pension wealth due to increasing interest rates but generally the population may be better off from a retirement income point of view.
In most regions aggregate pension wealth exceeds aggregate property wealth. The exceptions to this are London, where property wealth far exceeds pension wealth, the South East where they are neck and neck and the South West where property wealth comes a close second.
Crunching the numbers
Dig deeper into the private pension wealth and some interesting numbers are produced.
Firstly, 21% of 55 to 64-year-olds are currently accruing defined benefit pensions with a median value of £209,200. However, although the participation rate for men and women is nearly equal, the median value is very different; £359,600 for men against £152,800 for women.
The participation rate for the same age group in defined contribution pensions is only 13% with the median pot being just £15,000. Here male participation is greater, 17% against 10% women with the median pot being £20,000 against £9,000.
We can, therefore, conclude that only a third of those aged 55-64 are currently accruing pensions.
However, 64% of all employees in this age group participate in pensions with a median value of £104,000. Only 12% of this age group have a preserved defined benefit pension with a median value of £107,700. 16% have retained defined contribution pension benefits with the median value being £17,000.
There will be some crossover between the various entitlements I have identified.
For example, someone accruing a defined contribution pension today may also have a preserved defined benefit pension. Yet, if there were no crossover, nearly 40% of 55 to 64-year-olds currently have no private pension whatsoever. The greater the crossover, the greater the proportion with no private pension.
Of those aged 65-69, the recently retired, 64% are in receipt of private pensions with a median value of £208,200. This is higher than 55 to 64-year-olds.
Therefore, unless something unexpected happens with the pension wealth of 55 to 64-year-olds I would expect those coming up to retirement to not have so much to spend in retirement as those who have recently retired.
Will their spending requirements be any different? They will still be faced with images of retirement their pensions may not support.
It is possible to conclude that those with pension pots in excess of the median can expect a retirement income of more than £10,000 per annum on top of their state pension. The next third will receive up to £10,000 per annum on top of their state pension. The remaining third will receive just their state pension.
Two-thirds of the next generation of pensioners will have an income of less than £18,000 per annum. Compared to what they were receiving while working, will they be prepared to live with such a reduction in spending capability?
If they are not, will they turn to their housing wealth to supplement that income? I suspect many will. Close to 75% of pensioners are homeowners. The numbers vary, but year on year close to 600,000 reach retirement age.
This indicates that more than 200,000 potential customers will be created each year that will need help in combining their pension and housing wealth to meet their retirement needs. That is a large number that will need specialised planning and advice to arrive at what will be the best retirement strategy for them.
This ONS report does not break down property wealth by age. However, this is where the Retirement Advantage report regarding the amount of property wealth the over 55’s have adds value. With all this data, we can safely say that the demand for holistic retirement income planning will continue to grow for many years to come.
Bob Champion is chairman of the Later Life Academy