As a report reveals that the over-65s have higher incomes than working families, how are they spending their money?
When Isabel Hamilton gained her degree, landed her first internship and then her first job in the pharmaceutical industry, the first people she called were her mother and stepfather. Two years later, when she decided the time had come to buy a flat, the first people she called were her grandmother and grandfather.
“It might sound cynical, but my granny always said I was to go to her when I needed a deposit for a home,” says Hamilton, now 29. “She was adamant that as my parents don’t have a huge disposable income, because my sister and three half-brothers are much younger than I am, she would be the one helping me onto the housing ladder.”
This week’s announcement from the Institute for Fiscal Studies (IFS) that, on average, pensioners now have higher incomes than families may have surprised some, but the nation’s grandchildren; one in ten young adults is relying on the bank of Gran and Grandad to help finance their first property.
The IFS findings show that pensioners’ incomes outstripped those of working households in 2010 and, at £388 a week, are now 5 per cent higher. A number of factors caused this; young people who were unable to find jobs or afford houses were worst hit by the recession and forced to move back home. And despite the credit crunch headlines about the calamitous effect of plunging interest rates on the income of older savers, final salary pensions have cushioned the fall.
Many who were debt-free have shrewdly invested in buy-to-let property, while home ownership among the over-60s has risen from 45 per cent in 1980 to 77 per cent in 2013; among the under-30s, however, it has dropped from 29 per cent to 13 per cent. Yet it would be wrong to equate pensioners’ gains with young people’s losses.
Paul Green, director of communications at Saga (LSE: SAGA.L - news) , says: “The headline figures from this report are important but it’s equally important to put them in context. While on the face of it, incomes for some older people are increasing in real terms, much of this is due to the very real need for them to continue in employment past state retirement age.”
Also, since September 2007, the retail prices index measure of inflation has gone up by 16.6 per cent for the general population but by 22.2 per cent for those 75 and above. This is because elderly people do not benefit from the drop in mortgage interest payments, unlike younger people, but continue to spend their money on outgoings, such as food, which are going up.
“It is also important to understand the impact their continued spending has on our economy as a whole,” adds Green. “Not only does this directly contribute to employment opportunities for people of all ages, including the young, they make a huge contribution to the economy. If, as of 2003, over-fifties consumer spending had only grown at the same rate as under-fifties spending, by 2015 GDP would be depressed by 6 per cent or £105.2 billion.”
The Women’s Royal Voluntary Service has estimated that after the deduction of pensions, welfare and health care, far from being a drain on the economy, over-65s make a net contribution of £40 billion through tax payments, spending power, donations to charities, volunteering and childcare. The image of the SKI (Spending the Kids’ Inheritance) generation taking grown-up gap years and splashing out on Lamborghinis is rather wide of the mark for many.
The IFS figures turn the spotlight on to (relative) pensioner prosperity, but the situation is more complex. Not all pensioners are doing well, and those that are take their family responsibilities seriously. As parents have experienced a drop in living standards and disposable income because of fixed costs coupled with deteriorating employment conditions, withdrawals from that Bank of Grandma and Grandad have significantly boosted many family budgets.
According to a poll of more than 2,000 grandparents last month by LV financial services, 86 per cent have given cash to their grandchildren since 2012 and, while most give on average £30 a month to their loved ones, some have given as much as £50,000 to help with house-buying. One in six grandparents (17 per cent) have made contributions to child trust funds or savings accounts over the past five years, while 5 per cent have helped with school and university fees.
Significantly, 37 per cent of all grandparents are planning to give their grandchildren financial help in the future, not just because they want to be around to see them enjoy the cash but because they don’t want their gifts reduced by inheritance tax.
Under new pension rules coming into effect next April, retirees will be allowed to take all of their pension savings as a lump sum, and one in 16 grandparents (6 per cent) are already considering taking out significant amounts of cash to help their grandchildren.
“The generosity of grandparents is clear to see, and it is great that so many feel comfortable enough to be able to help out their family,” says Richard Rowney, LV life and pensions managing director. “However, the average retirement is now much longer than past generations and people’s lifestyles and associated costs are likely to change over this period.”
The brutal reality is that greater longevity does not necessarily correspond to improved health; dementia, diabetes, cardiovascular disease and cancer are all strongly correlated to age as well as lifestyle.
The King’s Fund medical think tank has concluded that 58 per cent of those over 60 are affected by chronic disease as opposed to 14 per cent for those under 40. Moreover, if working patterns continue, the “old age dependency ratio” (the number of people over the state pension age for every 1,000 people of working age) will have increased from 280 per 1,000 in 1971 through 314 per 1,000 in 2009 and reach a projected 349 by 2032, even with the raising of the state pension age.
Deborah Stone, co-founder of advice website myageingparent.com says that even moderate wealth can be subsumed by healthcare costs. “The average cost of a care home in London is £40,000 a year,” says Stone. “Outside London, it’s slightly lower but still very expensive. At the moment the cap on care charges is £23,000 and thanks to a new care Bill, that cap is being raised to £72,000, but that figure still doesn’t cover all aspects of care such as bed and board fees and anyone with assets including their home, will have to pay.
“If an elderly person is in a care home for four or five years, it’s going to wipe out most of their savings, and that’s why it’s important to plan for care and how to manage those future expenses.”
As pensions shrink, younger generations are facing a less affluent retirement than their parents and grandparents seven in ten private sector workers have no private pension. To help meet the shortfall, the Government is rolling out its automatic enrolment workplace pension scheme.
“Current pensioners are widely tagged as the golden generation who will quite possibly be the last significant cohort to benefit widely from final-salary pension schemes from both public and private sector employers,” says Jon Dixon, director of Attivo Financial Planning Limited. “As their children, typically born in the Sixties, Seventies and Eighties, approach retirement they, too, are likely to have some degree of final salary underpinning of retirement income. But unless their children are compelled or are able to save more than the current total of about 8 per cent into auto-enrolment plans, their incomes and standards of living in retirement will be disastrously decoupled from those of their grandparents.”
The problem, he predicts, will be compounded by the prospect of long periods of unemployment for school leavers and graduates that will prevent them from saving a significant sum to put towards a home, let alone invest for a distant retirement, until they reach their thirties.
“As a country competing in a global economy, we need to create personal and national wealth,” says Dixon. “While automatic enrolment and larger ISA allowances are very welcome steps, much more needs to be done to replicate the retirement success of previous generations.”
Who pays the price?
The average weekly income of pensioner households is £388 — 5 per cent more than working-age ones
The over-fifties own more than 80 per cent of housing wealth
Almost one in two private landlords is aged 55 or above £1,000 spent on a house in 1979 (when 65-year-olds were 30) is worth £10,500 today (£17,000 in London)
The proportion of young people who own homes has fallen from 45 per cent in the mid-Sixties to 21 per cent
One in four people aged between 22 and 30 are now living with their parents
Data: Institute for Fiscal Studies
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