Pensioners underspending and bequeathing most wealth on death

The study, published on Monday, shows that many older people have been cautious with their savings, which the thinktank said could lead to widening inequality in the UK.

Ideally individuals would be able to manage their desired balance between retirement income, long-term care and legacy provision

Natanje Holt, Bravura Solutions

The research looked at how average wealth evolved over the 12-year period 2002–03 to 2014–15 for individuals observed consistently over that period.

On average real net financial wealth is drawn down by 17 per cent at most between ages 70 and 80, and 31 per cent between ages 70 and 90, according to the research. 

It suggests that, for many, most wealth will be bequeathed on death – unless there are large expenses associated with death itself that are funded out of wealth.

However, according to the IFS report, most people do not appear to experience large end-of-life expenses that would eat up remaining wealth holdings.

English Longitudinal Study of Ageing ‘end of life’ interviews with respondents who died between 2002–03 and the end of 2012, showed that just 6 per cent of individuals faced some out-of-pocket costs for medical treatment outside the NHS in the last year of life.

Only around 7 per cent of people who took part in an ‘end of life’ interview received assistance with daily activities from a privately paid employee in the run-up to death. Around 21 per cent did stay in a nursing or residential home in the last two years of their life, but not all of these individuals would have paid for this care privately.

The effects of underspending

Since the introduction of pension freedoms in 2015, there have been concerns about people emptying their pension pots too soon. But the IFS research shows there are also problems associated with being overly cautious.

Tom Selby, senior analyst at platform provider AJ Bell, said: “It is becoming increasingly clear that underspending in later life could be just as big an issue as overspending – particularly where this leads to people suffering avoidable financial hardship.”

Earlier this year, as part of an inquiry into freedom and choice, the Work and Pensions Committee called for the development of default retirement pathways to ease uncertainty about how long members will live.

But Selby said that default solutions, which aim to ensure people spend the ‘right’ amount in retirement, risk “hardwiring inertia into the pension system at exactly the point people need to be engaging”.

“A greater focus must be placed on improving communications and using behavioural nudges to get people interested in their retirement outcomes,” he added.

Steve Webb, director of policy at pension and investment provider Royal London, suggested that people with financial wealth may have enough from state and occupational pensions to give them the income that they need.

While being too prudent is not ideal, it is perhaps only a major concern if it affects the individual’s health and wellbeing.

“If pensioners are spending too little to give themselves a decent standard of living in retirement, this would certainly be a worry,” said Webb, but suggested that those with modest spending needs may derive “satisfaction from the prospect of leaving a meaningful sum to their family”.

For those who are worried about running out of money, an annuity remains a worthwhile option, Webb said.

Similarly, Natanje Holt, retirement specialist at pension software company Bravura Solutions, said: “Frugal spending is only worrying if the individuals are sacrificing their quality of living to the detriment of their health and wellbeing.”  

She said leaving an inheritance can give meaning to people’s lives, adding: "Ideally individuals would be able to manage their desired balance between retirement income, long-term care and legacy provision.”

Different attitudes across generations

Attitudes towards finances can often differ drastically over generations, and there is no guarantee that this trend will continue.

Peter Bradshaw, director of Selectapension, pointed out that the report focuses on those who died between 2002 and 2012 – and were likely to have been born before 1935. 

He noted that this generation lived through a depression and the second world war – with many having been brought up to save hard and put something aside.

“It would be interesting to see the results if you ran the same study in 10 years’ time and compared it against the baby boomer generation,” Bradshaw said.

Jamie Smith, financial adviser at Foster Denovo, echoed this view. While the reasons why pensioners are spending less than they can afford to are complex, “I would argue that one of the reasons is due to a generational mindset of the baby boomers born in times of austerity following the time of WW2”, he said.