pension guidance service

Advisers must help to get Retirees spending



Posted on: 20th September 2018

From the introduction of pension freedoms in 2015, the fear that retirees would waste their savings was widespread. It was believed that they would have little regard for their future needs. The media painted a worrying picture of retirees spending cash on expensive cars before falling on state benefits. Had someone bothered to take note of the data on expenditure patterns in retirement, this wouldn’t be the case.

In fact, recent research from the Institute for Fiscal Studies has found that retirees are doing the opposite. Instead of throwing money down the drain, they are spending too conservatively.  The report looked at the use of wealth in retirement. It took note on how property and non-pensions financial assets were drawn down by retirees between 2002 and 2015.

Retirees Spending: Anything but Reckless

It was discovered that “On average, real net financial wealth is drawn down by (at most) 17 per cent between ages 70 and 80, and 31 per cent between ages 70 and 90. This is significantly slower than the decline in remaining life expectancy between these ages.

 “This suggests the majority of wealth among those currently retired is set to be bequeathed rather than used to finance retirement spending.”

However, the spending patterns of those retiring today may differ to those before them. This is due to defined benefit pensions making up a smaller part of their income. This gap is only set to widen. Regardless, it is implied that the current spending rate would leave retirees with almost 70 per cent of their real financial wealth by the age of 90. What’s more, this does not count property.

Paul Armson: How Standard Financial Planning Can Fail Clients

One particularly important thing to consider is how health changes throughout life. According to the report, from age 84 to 91, median financial assets remained rather level. This exposes the strong myth of U-shaped spending patterns in retirement. Many analysts predict a U-shaped pattern of spending as retirees age. They assume that once people retire, they will spend significant amounts of their pension on travel, hobbies and interests. Their spending should then decline as they become less able to enjoy these activities. According to this assumed pattern, medical and long-term care increases towards the final years of a retirees life. This means that spending should then go up.

Only 6 per cent of retirees faced costs for medical treatment outside the NHS in their final year of life. Only 7 per cent received assistance with daily activities from a privately paid employee before their death. 21 per cent stayed in a nursing home or residential home in the last two years of their life. However, not all of these would have had private care.

For those who do end up paying for care, property wealth is still a viable source. The paper found that over a third of homeowners at age 50 would move by age 70. More than half would move by age 90 if they lived that long. However, few of these moves were due to finances. Only 1 in five ended up selling before age 90 without buying another. For those over the age of 80, an average of £49,000 was released in downsizing. This shows that retirees are not spending as much as they could.

How to model income in retirement

A vital part of a planner’s job is to make sure clients get the financial help they need. This includes working out a withdrawal framework that is not just sustainable but provides maximum spending. This is something we need to help retirees with. They should be able to feel secure in their spending.

For years, the industry has led retirees to this fear that their cost of living in later life will only worsen. It’s not hard to connect this to them being overly cautious about spending their hard-earned wealth. However, life is for a living. They must be reminded that this money cannot be taken with them when they go.

Talk to Haven IFA

The best way to know how you can get the most out of your retirement is to have an independent financial adviser there to guide you. Haven IFA can offer you the support and financial help you need in the years leading up to and during retirement. Get in touch to see how we can help