If you were born after 1960, chances are you’ll be worse off than your parents when you retire, according to economists. Caroline Lindsay finds out more.
According to a new report, published yesterday by the Institute for Fiscal Studies, it looks as if the post-war trend for each generation to be richer than the last may be coming to an end. People in the 34 to 53 age bracket will suffer as a result of inadequate pay rises, poor pensions and rising housing costs. If they have few savings, their only hope of a comfortable retirement is a large inheritance: “The economic fate of the 1960s and 1970s cohorts may be relatively dependent on the fortunes of their parents,” the report states.
It also found that family finances have been in the wars over the last 10 years: between 1974 and 2002, households saw income grow by an annual average of 1.5%. Since then the rise has been a measly 0.1% a year. According to the report, the average household income of those born in the sixties was typically £615 a week by the age of 40, while those born in the seventies are on only £570 a week, adjusted for inflation, with home ownership also declining. It also highlights a “rapid switch” away from well-funded company pensions which has affected those born in the sixties and seventies whose parents often benefited from such schemes.
In its conclusion, the IFS warns: “Individuals born in the 1960s and 1970s have no higher take-home income, have saved no more previous take-home income, are less likely to own a home and are likely to have lower private pension wealth.”
All in all, this suggests that the long-term fortunes of younger generations may be more tied to the wealth of their parents than has been the case for those already at, or close to, the state pension age. Those not fortunate enough to expect a significant inheritance look likely to be worse off in older age than current, and soon-to-be, retirees.”
Andrew Hood, a research economist at IFS and an author of the report, said: “Since the Second World War, successive cohorts have enjoyed higher incomes and living standards than their parents. Yet the incomes and wealth of those born in the 1960s and 1970s look no higher than the cohorts who came before them. As a result, younger cohorts are likely to have to rely on inheritances to be better off in retirement than their predecessors. But inheritances are unequally distributed, with households that are already relatively wealthy far more likely to benefit.
“They will also tend to find that their state pensions replace a smaller proportion of prior earnings than is the case for those currently above, or around, the state pension age.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, told The Courier: “The IFS report paints a predictably bleak picture of the future prospects for those born in the 1960s and 70s. Based on current trends, it is probably safe to assume that the future looks no brighter for subsequent generations.
“As a country and as individuals we are living beyond our means, spending our wealth today with not enough thought for the needs of tomorrow. Our long-term savings have consistently been below levels necessary to ensure a prosperous old age. The decline of final salary pension schemes, from a highpoint in the mid-1960s through to today, has not been offset by a compensating increase in defined contribution pensions. The average total contribution into such schemes today is around 9% of income. This is not enough.
“As part of the auto-enrolment programme, it is absolutely vital that we take advantage of this opportunity to reset people’s expectations of how much of their monthly income they should spend and how much they should save for their later life. We are in danger of squandering this opportunity to engage employees with the reality of their retirement prospects.
“As a broad indicator, anyone who isn’t saving at least 12% of their income on a regular basis almost certainly isn’t saving enough.
“For the adults born in the 1980s and 1990s, the prospects look even worse as they will be saddled with not just the burden of their own costs, such as university education, but also the consequences of their parents’ profligacy. The huge increase in the retired population, with around one third of babies born this year now expected to reach the age of 100, means that the country’s health and care costs will inevitably spiral upwards, consuming a larger and larger share of state spending and private wealth.
“Never mind inheritances, at the present rate, the only financial bequest we are going to leave to future generations will be costs and liabilities.”
Jack Boyle, assistant solicitor with Blackadders LLP in Dundee, added: “As a child of the eighties, I find this news very alarming. It is all very well trying to live for today and worry about tomorrow later but news like this makes it harder to adopt such a philosophy. These reports make it clear that younger generations will have to take planning for the future seriously. The introduction of pension auto-enrolment is surely a good thing. Making it mandatory for employers to enrol eligible employees into a pension scheme, combined with the short, one-month period within which employees can opt out, will surely combat one of the key factors in poor future planning: apathy.
“Of the million people who were auto enrolled in the first year, only approximately 10% opted out. Of course, the opt out rate may increase as more small and medium-sized employers enrol. Who could blame a worker with a young family who is trying to get on to the property ladder from thinking that a percentage of their static, unattractive, salary could be better put into the house deposit fund rather than a pension pot?”
Meanwhile, Stephen Webster, head of investment at Thorntons Investment Services, said: “Planning for the future, especially looking towards retirement, is something we actively encourage our clients to do. No one knows what’s around the corner so looking and considering the best options for you means you are prepared for the challenges that may lie ahead.
“Firstly, it’s important, if possible, to have an open and frank discussion with your parents to ensure they have suitable wills and powers of attorney in place.
“Too often, a lack of planning can mean unnecessary income going to HMRC and having appropriate wills in place can mitigate against an inheritance tax hit at a later date.
“The cost of long-term care is also a concern for the older generation and advice should be taken on what, if anything, can be done about the protection of assets such as the family home.
“I would also urge people to take professional advice about their pension, as careful planning is sensible and well worth doing.
“What we often see is clients putting these things off or leaving it too late, which in the long run just adds unnecessary stress to an already difficult situation.”