Rising pensioner incomes: lies, damned lies and statistics?

By Tony Watts OBE

The recent report finding that today’s pensioner households are, on average, £20 a week better off than those of working-age people made headlines in most of the media.

Not surprisingly so, as it would, on the surface of it, appear to vindicate the siren calls to end the “triple lock” on State Pension increases… including those being made by the publishers of the report, the Resolution Foundation – whose very laudable mission is to improve the standard of living for low and middle-income families.

The triple lock – introduced by the Coalition Government – guarantees that State pensions rise by the same as average earnings, the consumer price index, or 2.5% – whichever happens to be the highest that year.

The story had echoes of Macmillan’s declaration in 1957 to the effect that: “Indeed let us be frank about it – most of our people have never had it so good.”

But is it as straightforward as it appears? Are older people getting all the breaks at the expense of younger generations? And is it time to review the automatic rise in state pension at an annual level that most workers would envy?

Well one of the key aspects of the finding, lost in some of the small print in some news outlets, was that their calculations were made on household incomes AFTER housing costs. Before housing costs are taken into account, working-age households continue to have higher incomes than pensioner households… it’s just that many older people either own their own homes or have relatively small mortgages.

Some 70% of those born between 1926 and 45 own their homes outright, with just over 40% of baby boomers (1946-65) owning theirs, with another 30% still with mortgages to pay off.
Of course that still means that older people have, on average, more disposable income – largely as a result of having worked, saved and invested for the last 40 or even 50 years. Many pensioner households (defined as having someone in it of State Pension Age) also continue to have someone still holding down a job or running their own business – which does distort the figures more than somewhat!

The figures also refer to the typical or median pensioner household: so half of pensioner households have a higher income – but half of them have a lower income than this. Some of them, considerably lower.

Depending on the State Pension…

So just how important is this argument about the triple lock, as well as the benefits that accrue to those of pensionable age – such as Winter Fuel Allowance and Bus Passes?

For those who depend on the State Pension, rather than it being a helpful top-up to their other streams of income, it’s very important indeed – because of the gulf in living standards between those at the top end and bottom end of retirement incomes.

According to Age UK:
• 1 in 7 pensioners (1.6 million or 14% of pensioners in the UK) live in poverty, defined as having incomes of less than 60% of median income after housing costs.
• A further 1.2 million pensioners have incomes just above the poverty line (more than 60% but less than 70% of median income).
• Women are more likely to be in poverty than men, and older pensioners (especially those aged 85+), single people living alone, private tenants and Asian pensioners are at particular risk.
The numbers of people living on low income, they say, has fallen substantially since the mid-1990s – but progress has stalled and numbers have been unchanged in recent years.

It’s also worth remembering that the basic State Pension, is currently no more than c£120 a week and even less for many – while the new, arguably more generous flat rate version (c£155 pw) does not cut in unless you are coming up to receiving one, and you are a man born on or after 6 April 1951 or a woman born on or after 6 April 1953. A great many pensioners (as many as four out of five, according to some reports) will not qualify for the full amount anyway.

And the reason the triple look was introduced was to try and get pensions back up to a sensible level after decades of being linked to RPI (and so losing ground on average earnings).

State Pensions NOT a “benefit”

Both the old and new forms of State Pension rely on contributions that individuals have made over many years – which is why the use of the word “benefit” should never be made in the context of the State Pension.

And not an overly generous one either: for those dependent on a State Pension, rubbing by on six or even seven and a half thousand pounds a year, the new report will ring very hollow indeed.

But there are other points in the report that shouldn’t be ignored. The fact is that working households ARE struggling to get by on an average of £20,000 a year. That level of income makes buying a home nigh impossible, while private rental levels mean that a very large percentage of their income will go on keeping a roof over their head, leaving very little over.

Years of austerity, minimal pay rises and zero hours contracts have left many hard working people struggling just to get by. No, it doesn’t seem fair. But does that mean we should look to pensioners to receive less?

Yes, there are a great many older people who do own their own home, and many are living very comfortably indeed because of their company or private pension. But they do pay income tax on that – including the money they receive from their State Pension. That “golden generation” cohort, incidentally, is set to shrink considerably in years to come as the numbers in receipt of (relatively) generous pensions shrinks.

The terms of the triple lock also mean that it is only in years when both inflation and pay rises are low that pensioners really make any ground on the rest of society.

Arguably the one move that could be made without much political disturbance is to make benefits taxable – such as Winter Fuel Allowance, brought in as a fairly crude instrument to help the poorest households. Or make them payable only to those below a certain income level, for instance.

But for the generations to come, the State Pension is likely to assume even greater importance than it does now. Reductions or caps now are likely to impact significantly on the retirement years of anyone now in their 40s or 50s as well as existing pensioners… so a very large number of people indeed.

It will be a brave political party which tries to wind the clock back on this one…

Planning ahead

So, how to plan for this uncertainty? Well, in the RetireEasy LifePlan you can try different assumptions on pensions growth in the State Pensions page and see what impact different rates of growth affect your future finances – they can add up to a sizeable variation over the long haul.

In LifePlan Premium you can even save your assumptions and compare the outcomes in Multiple Scenarios. If you are not already signed up to RetireEasy, try it now – the basic level is free; and, if you are registered, look at upgrading to Premium for this and a wide range of other very helpful features… including daily updates of the value of your investments and savings.

Go to www.retireeasy.co.uk to find out more

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