Major new research shows home-owning pensioners ‘front-loading’ spending in retirement

Pensions & benefits DC pensions DB pensions Personal finance

A major 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 the future, millions of people who work 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. However, 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?

To inform these decisions, this new report - ‘Downhill all the way?’ – 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.

Key findings are:

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 front-load their spending.

This is shown in the charts below:

Spending per head (£ per week, 2024 prices) by housing tenure and age (1968-2019)

Source: Authors’ calculations based on Family Expenditure Survey and successor surveys

Across the whole period from 1968 to 2019, homeowners are more likely to ‘front-load’ 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.

This is shown in the chart below:

Spending per head (£ per week, 2024 prices) for homeowners by age group, broken down by spending category (1968-2019)

Source: Authors’ calculations based on Family Expenditure Survey and successor surveys. Housing costs include local property taxes such as domestic rates/council tax, as well as property maintenance and insurance.

Taken together these charts show 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.

Further work on this dataset will explore these differences in more detail.

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.

Steve Webb Partner at LCP

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 Ricky Kannabar Senior Lecturer at the University of Bath

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.

Dr Aida Garcia Lazaro Research Fellow at the University of Bath

Read the paper

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Notes to editors

The full report: “Downhill all the way? What should pension schemes assume about pensioner spending through retirement?” is by Dr Aida Garcia Lazaro, Dr Ricky Kanabar and Sir Steve Webb and is published by the Institute for Policy Research at the University of Bath and is available at www.bath.ac.uk/ipr
The data is drawn from the Family Expenditure Survey, the Expenditure and Food Survey and the Living Costs and Food Survey for the period 1968-2019. These are annual government surveys of household spending, income and personal characteristics. The full sample comprises data on over 100,000 pensioners.