In this Research Note, the FCA and The Pensions Regulator (TPR) have identified the prospect of people not having an adequate income, or the income they expect, in retirement as the overarching harm in the pensions and retirement income sector.
The major determinant of an individual’s income in retirement is their accumulated level of wealth. In this Research Note, we look at the distribution of wealth holdings in Britain using the latest wave of the ONS’ Wealth and Asset survey (WAS), and consider what this can tell us about individual preparedness for retirement.
The paper sheds light on 3 main areas:
1. Distribution of wealth accumulation by age
We look at levels of wealth accumulation in Britain by age, considering both pension and non-pension wealth. We find that wealth is very unevenly dispersed, both between different age groups and within the same age groups.
There are significant numbers of individuals either in or close to retirement who have accumulated substantial wealth. In the wealthiest age group - 60 to 69-year-olds – the median individual has a total wealth of £280,000, the top 25% have approximately £630,000 and the top 10% have more than £1.25 million. But within this group there is also evidence of hardship, with more than 10% of individuals having no private wealth.
Looking at younger generations, half of all 20 to 29-year-olds have no retirement resources and only half of 30 to 39-year-olds have £30,000 saved.
2. How the distribution of wealth relates to differences in expected lifetime income
How much people save is related to their expectations around how much they will earn in their lifetimes. An individual who expects a high lifetime earning that fluctuates considerably over their lifetime would be expected to save more and accumulate greater levels of wealth than would otherwise be the case.
In this Research Note, we examine the relationship between lifetime earnings and wealth accumulation. We find strong evidence that, on average, individuals we estimate will have higher lifetime career earnings accumulate greater amounts of private wealth, while individuals estimated to have lower lifetime income accumulate the least wealth.
3. Preparedness for retirement
We look at how prepared those aged 60 to 65 are for retirement, in terms of savings. Our findings suggest this is something of a mixed picture.
Based on the resources they have accumulated to date, the average individual might expect to achieve a gross annual retirement income of £14,200 to £17,000, but this varies greatly across individuals.
For wealthier individuals, the majority can expect a modest or comfortable retirement. But at least half of poorer individuals are not expected to achieve the minimum income standard and are likely to be dependent on the state pension and benefits.