There are significant difference between homeowners and renters when it comes to spending patterns in retirement, according to new research from the University of Bath and consultants LCP.
Homeowners tend to spend more in the early years of retirement, but this declines as they age. This contrasts with the spending patterns of those in rented accommodation, who tend to have flatter spending, which stays at a lower but more constant level throughout their retirement.
The research found that for homeowners aged 65-69 the average spending per head was just under £350 a week, falling to £250 a week for those aged 85 or over. (All figures are in 2024 prices).
Meanwhile for social tenants the average weekly spend for a 65 to 69 year old was just over £225 a week – a figure that remained broadly level throughout each five year age increase.
This research was based on the spending patterns of thousands of pensioners over the past half century, by an in-depth analysis of the government’s annual survey of household spending.
LCP says these findings needed to be taken into account as the UK shifts from a DB to DC pension environment, with the majority of those working in the private sector now rely primarily on DC pensions. This will require workers to make active decisions on how much money they take from their pension pot throughout their retirement, and whether this is via drawdown, annuity, or a combination of both.
LCP says it hopes this research will be used when shaping guidance and advice options designed to help DC savers make these decisions. It says that to date one of the problems has been limited evidence regarding the trajectory of pensioner spending in retirement. For example, should the money be front-loaded to support a more active early phase of retirement, or end-loaded to protect against rising prices and the risk of later life care costs?
It says it hopes this new report, entitled ‘Downhill all the way’ will inform this process. As well as highlighting different trajectories and patterns of retirement spending, the report also found that for most pensioners retiring today with just DC provision, the state pension will provide the majority of income in retirement.
LCP partner and former pension minister Steve Webb says: “The starting point for designing post-retirement products should be analysis of what pensioners actually spend.
“This data provides startling evidence of the diversity of pensioner preferences and in particular that homeowners strongly prefer to spend more of their retirement wealth in the earlier part of their retirement, whereas renters may want and need a steadier income. The more that providers can find out about their savers, the more the post-retirement journey can be tailored to be a good fit for different groups of pensioners.”
Dr Aida Garcia Lazaro research fellow at the University of Bath said the research also sheds light on how becoming a widow affects income and consumption per head, particularly in the context of recent changes to state pension inheritance rights and the rising age at which individuals experience widowhood. The University of Bath said further research is needed to identify other key factors to differentiate pensioners, with this work helping inform policymakers to design more evidence-based policies.
Dr Ricky Kannabar, senior lecturer at the University of Bath adds: “This research underlines the importance of understanding how pensioner spending changes across cohorts.
“In particular, pensioners are not a homogenous group and analysis by housing tenure highlights large differences in the spending levels and behaviour exhibited by each group. Further research on the determinants of pensioner spending in retirement and how this has changed over time is needed to adequately inform the design of drawdown products.”
Standard Life managing director for individual retirement Claire Altman says: “In a world where we are living longer, pension savings need to stretch much further –potentially over decades – and it can be difficult to predict how much you will need to spend and when. This question is also key for the industry and policymakers, looking to address some of the challenges facing future retirees who will have large DC pots.
“The assumption was that spending would be higher in early retirement, with a dip as people got older and another increase as spending increased due to things such as care costs. However, LCP’s report highlights that there is no ‘one-size-fits-all’, with spending patterns dependent on factors such as home ownership or if someone has lost a spouse or partner in retirement.
“Ensuring good outcomes at retirement is critical, and as the nature of retirement is changing, adviser engagement continues plays a vital role. However there is also a need for default retirement solutions through guidance for those not taking financial advice, and that these consider the different circumstances facing groups of retirees. It is essential that people have the right support to effectively plan not just for the day they retire, but the decades that follow, and this is where role of both the industry and government is of paramount importance.”
