You’re a long time retired

This paper entitled “You’re a long time retired: making the most of financial and housing assets at retirement” was presented by Dr Patrick Nolan at the NEST Forum 2013.

Decumulation is a process where assets that have been built up earlier in life are converted into incomes to last throughout retirement. Not only are growing numbers of people entering this phase but decumulation decisions are becoming more important.

Changes in longevity mean people can expect to spend longer in retirement – a person who retires at 65 in 2035 will have a one-in-four chance of retirement lasting three decades – and so they must make even more of the financial and housing assets they have accumulated. Retirees will need to understand and manage financial products’ risks with the end result that pension choice will be even more important. Retirees will also need to look to housing wealth to improve outcomes, which makes decisions around downsizing and the use of equity release critical. These changes create a need for industry and government to raise their game.

Key figures in this report

The over 65 population is expected to increase by 64 per cent (6.6m people) between 2010 and 2035.

The share of voters over 65 is expected to increase from around one-in-four in 2010 to one-in-three by 2050.

A person who retires at 65 in 2010 has an 85 per cent chance of a decade in retirement, 60 per cent chance of two decades and 16 per cent chance of three decades.

A person who retires at 65 in 2035 has an 89 per cent chance of a decade in retirement, 68 per cent chance of two decades and 26 per cent chance of three decades.

NEST estimates 1.2m private sector and not-for-profit employers will have to automatically enrol their workers into a workplace pension by 1 February 2018. These firms employ 11m eligible but unpensioned workers.

The Pensions Income Choice Association estimates only one-in-three people approaching retirement move their pension fund to improve their income. Oxford Economics estimates that encouraging defined contribution pension scheme members to review their options would have increased pensioner incomes by £13.9m in 2010, equivalent to £169 per policyholder.

The McKinsey Global Institute estimates that if investors retiring in the next 10 years maintain the equity allocations of today’s retirees, equities will fall from 42 per cent of US household portfolios to 40 per cent in 2020—and to 38 per cent by 2030.

The Equity Release Council estimates that house price growth has been 91 per cent while pensioner income growth has been 46 per cent since 1997.

If dwelling numbers increase at the rate of the past 20 years, growth in household numbers up to 2035 (22 per cent) will outstrip growth in dwellings (17 per cent). This will increase the importance of addressing regional and other mismatches between demand and supply.

Savills estimates that half of over-55s have a bigger house than they need.

Oxford Economics estimates equity release could potentially raise around 1m pensioner households out of poverty for a year between 2012 and 2040.