Home-owning pensioners ‘front-loading’ spending in retirement

The government is due to introduce new legislation which would require pension schemes and providers to set up ‘defaults’ which will shape the way people draw down on their pension if they don’t make active decisions.

To investigate what pensioners actually want, a new research collaboration between pension consultants LCP and the University of Bath has provided new insights into how pensioners choose to spend their money in retirement, revealing major differences across the pensioner population.

In future, millions of people who worked in the private sector will retire with a state pension and one or more Defined Contribution pension pots. As things stand, savers are largely left to their own devices as to how they draw on their pension pot through retirement. But legislation shortly to be presented to Parliament will place a legal duty on pension providers to offer a ‘default’ post-retirement journey. In essence, this will shape how retirees draw money out of their pension if they make no active choices.

The big problem for providers is that there is 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?

The new report has analysed data on the spending patterns of over 100,000 pensioners collected over more than half a century as part of annual government surveys of households.

For most pensioners retiring today with just a DC pension pot, the state pension will provide the majority of income in retirement. Under current legislation the state pension is expected to provide a steady real-terms increase in income through retirement.

In terms of the desired profile of spending through retirement, there are major differences between different groups of pensioners. In particular, those renting from a social landlord tend to have relatively flat real spending which is relatively low compared to homeowners who tend to frontload their spending. 

Across the whole period from 1968 to 2019, homeowners are more likely to ‘frontload’ their spending than social tenants, with the downward slope for homeowner spending becoming particularly noticeable amongst the most recent retirees.

Further analysis shows that this downward profile of spending by homeowners (who make up around three quarters of the pensioner population) is driven by a front-loading of spending on ‘luxuries’, which drops sharply as they get older. 

As a result, the report concludes that the way in which income is drawn from pension pots by default should be tailored as far as possible by providers to reflect the diverse preferences and needs of different groups of pensioners.

Steve Webb, partner at LCP and former pensions minister, said: “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 Ricky Kannabar, senior lecturer at the University of Bath, commented: “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.”

Dr Aida Garcia Lazaro, research fellow at the University of Bath, added: “This 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. Further research is needed to identify other key factors to differentiate pensioners. Our work will help inform policymakers to design more evidence-based policies.”