Some good news on pensions?

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Current retirees are living on, on average, 72% of pre-retirement family income, according to wave five of the English Longitudinal Study of Ageing (ELSA) launched last week. The study highlights how the poorest income quartile saw a 105% replacement rate post retirement. Those in the highest income quartile saw a 61% rate.

ELSA also provides us with some evidence that gradual retirement, something ILC-UK has been supporting for many years, may be becoming a reality. The research shows that drawing a private pension income is not synonymous with leaving the labour market. In 2010-2011, 47% of men and 31% women aged 60-64 who were in receipt of an income from a private pension, were still in work.

The likelihood that we will continue in work after beginning to draw our private pension has increased over time, according to ELSA researchers. But women are more likely than men to leave work at the point they start drawing their private pension.

ELSA also highlights a number of other interesting facts. For example, 83% of men and 61% of women aged 52 and over have at some point accrued rights to a pension payment.

But whilst the researchers found that while the proportion of individuals contributing to a private pension increases in the years immediately before retirement, average pension contributions do not generally increase over this period.

On the surface, the replacement rate looks very positive. But we should wary of getting too excited about the redistribution towards the poorest pensioners. Those living in the bottom quartile continue to live on very low incomes compared with the richest.

The figures above do not take account of, for example, housing wealth which could be decumulated. It is interesting in this context to note that while pension wealth is decumulated through retirement, ELSA reveals that other forms of family wealth do not, on average decline with age.

Looking ahead, it is hard to be optimistic that future generations might see the same replacement rates as today’s older people. Some would argue that makes a case for a redistribution of resources to the young. Yet younger people today should be wary of campaigning for poorer old age/pension benefits for older people. After all, we all hope to reach old age one day. And whilst auto enrolment may play a part in increasing savings rates among younger people, current levels are clearly inadequate to provide a decent income in retirement.

In some ways it is surprising that individuals are not choosing to invest more in their pension in the years just before retirement. At this stage, older people may have paid off a mortgage and children may have left the home or finished studying. The 25% tax free incentive should be proving attractive for people who could realise this advantage quickly.

The fact that other forms of family wealth are not on average being decumulated in old age is surprising. Older people should increasingly look to housing and other non-pension wealth to help support their needs for income in retirement.

The new wave of ELSA will undoubtedly offer significant opportunities for better understanding the current wellbeing of the older population. This wave paints a pretty rosy picture in terms of average replacement rates today. But it is hard to be confident that future generations will see similar returns. Auto-enrolment is a good step forward. But will we need to move towards compulsory saving sooner rather than later?

David Sinclair

The dynamics of ageing: Evidence from the English Longitudinal Study of Ageing 2002-10 (Wave 5) http://www.ifs.org.uk/ELSA/publicationDetails/id/6367

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