People in retirement have significantly higher incomes than earlier generations at the same stage in life.
New research has found that middle-income 60 to 74-year-olds are enjoying 60% higher income than the same age group back in the mid-1990s.
Earned income today for this age group is now 160% higher than twenty years earlier.
One factor behind this trend is higher employment rates for older men and women.
Longer lives is another factor, with rising life expectancy leading to higher total income during retirement.
Despite this income improvement, the research also found a gap between basic benefit levels for just below and just above the state pension age.
This gap has risen from 30% to nearly 130% since the mid-1990s.
With the state pension age continuing to rise, the Institute for Fiscal Studie is warning that this gap in basic benefit levels may not be sustainable in the future.
Speaking at the third ‘IFS at 50’ anniversary talk, Carl Emmerson, who is Deputy Director of the IFS, is sharing two key messages on the top of ‘The Future of Income in Retirement’.
He will say:
“The incomes of middle income 60 to 74-year-olds are now much higher than they were in the mid-1990s as private pensions and earnings have grown. Future generations may end up with lower private pensions.
“But there is much capacity for employment rates of older individuals to rise further: for example employment rates of men aged 60 to 64, which have been increasing since the mid-1990s, are still well below the rates seen in the 1970s when life expectancy was much lower and health less good.”
In addition to this message about rising incomes and capacity for higher employment for older people, Emmerson highlights that policymakers should consider doing more to support those who cannot respond to a rising state pension age by retiring later.
“Pushing up the state pension age as longevity increases makes sense. But there is a large – and growing – difference in support that the state makes available to low income households who are just below the state pension age and those who are just above it. Such a big gap may look problematic in the context of a rising state pension age.”Carl Emmerson, who is Deputy Director of the IFS
Within the speech, Emmerson explains that rising longevity means men who are approaching their 50th birthday can expect to receive a state pension for ten years longer than they would have done in the 1950s.
Back in 1950, a 50-year-old man would have lived to age 73, on average. This life expectancy would have meant eight years of state pension receipt, from age 65 onwards.
For a man now approaching age 50, the state pension age is 68, and typical life expectancy is 86, with 18 years of state pension receipt expected.
For women, typical life expectancy at age 50 in 1950 was 79, with a state pension age of 60. This gap between state pension age and life expectancy resulted in an average of 19 years of state pension receipt.
Today, a 50-year-old woman can expect to live to age 88 on average but has to wait until age 68 to start receiving her state pension, resulting in 20 years of income from this source.
Emmerson also explained that pensioners now have similar incomes, on average, to non-pensioners. This income equality is the result of more than 20 years of faster income growth for retired people, who have become less likely to be poor than younger people.
Since the mid-1990s, 60 to 74-year-olds with middle incomes have experienced strong income growth, averaging 2.2% a year. Rising state pension incomes drove this income growth, along with increases in private pension income, and even stronger growth in earned income.
The IFS reported that future generations might need to rely more on earned income into their 60s and 70s. This increased reliance on earned income is the result of less generous state pension income in the future, combined with smaller private pension pots, compared to earlier generations.
Since the mid-1990s, employment rates for older men have been rising. For 55 to 64-year-olds, employment rates are still below the rates seen in the late 1970s. This static employment rate for pre-retirees comes despite better levels of health and fewer jobs requiring strenuous physical activity.
For older women, levels of employment are now at record levels but remain below those of men. The IFS expects to see a rise in employment levels for women, as the cohort of employed women reaches their 60s, and also due to the higher state pension age.
Another key finding was the income levels for poorer households who are just below state pension age having fallen far behind those of the poorest pensioners.
Back in 1999, the poorest fifth of the population who were within five years above the state pension age had an average income some 17% higher than those within five years below the state pension age. That gap had grown to 70% by 2017.
Low-income individuals who have reached their state pension age enjoy a more generous state policy than those who are just below it.
In 1990, the equivalent to today’s Pension Credit was worth 30% more than the equivalent Jobseeker’s Allowance. This gap has now grown to 129%.
Jon Doyle is Founder and Financial Planner at Juniper Wealth Management. Advising clients since 2008 he has guided clients through good time, bad times and the ugly. With a clear vision on how advice should be delivered and strong opinions on how we should be investing money in order to live the life we want to live free from money worry.