Pensioners underspending and bequeathing most wealth on death

Many older people are underspending in retirement, and are set to bequeath the majority of their wealth to younger generations instead, according to research by the Institute for Fiscal Studies.

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.

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.

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.

Read the full article on Pensions Expert here.