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Pensioners are defying the worst fears around the pension freedom reforms and are holding on to their wealth in retirement, new research has revealed.
A report from the Institute of Fiscal Studies shows that cautious retirees are not spending most of their financial wealth but are holding back as much as they can to pay for care home fees or to leave it to family and friends.
It revealed that while wealthier people tended to consume their assets at a faster rate, all sections of society were on average underspending. People aged 55-64, who would have been on the cusp of retirement in 204/15 had an average of £390,000 in non-pension wealth – the majority of which (60%) was held in their home.
Another 22% was in savings and ISAs, 11% in other property, and 7% in business assets, land, and antiques.
The report shows real net financial wealth is drawn down at a rate of little more than 1% a year, with those aged 69 to 81 drawing just 14% of their wealth over 12 years, calculated between 2002/03 and 2014/15.
Rowena Crawford, associate director at the IFS, said older people do not ‘draw on their wealth much in retirement’, and most homeowners do not access the equity in their homes.
‘Even financial wealth is drawn down only slowly,’ she said. ‘This means that most wealth held by retired people is likely to be bequeathed to future generations, rather than spent.’
Crawford said this will have implications for current working-age people, especially those with wealthy parents and few siblings.
‘Given the increased freedom people spend their pension wealth in retirement, carefully monitoring how the use of wealth evolves in future will be important, both for the living standards of the retirees themselves, and also for younger generations.’
The pattern of squirrelling away wealth may change in future, however, as of those in their 50s, 30% expect to use savings, 30% expect to use their primary housing, and 10% expect to use other property to fund retirement.
Crawford said for those in their 50s, housing wealth ‘is not always considered ‘off limits’’ and these people are likely to downsize or use equity release products to access property wealth.
Tom Selby, analyst at broker AJ Bell, said some well-off pensioners may be tightening the belt too far when they did not have to.
‘Such thrift will be perfectly sensible in some circumstances, particularly where individuals have relatively small savings pots and choose to hold onto the money to cover any unexpected bills,’ he said.
‘That said, it is likely some of these people are overly worried about running out of money during retirement and are underspending as a result.’
He said this ‘reckless conservatism’ had already been identified in Australia, where individuals can access their entire pension pot in one go, and ‘may well prove to be a central issue for UK policymakers to address following the introduction of the pension freedoms in 2015’.