Majority of financial wealth bequeathed rather than spent
17 June 2018
A new report by the Institute for Fiscal Studies found that a large percentage of financial wealth will be left unspent during retirement and passed on to younger generations.
The report highlighted that “financial wealth is only drawn down very slowly in retirement.” On average, it is drawn down by 17% at most between the ages of 70 and 80 and 31% between ages 70 and 90, the report stated. This suggests that unless there are large costs at the end of life, the majority of financial wealth is set to be bequeathed rather than used to finance retirement spending.
While wealthier individuals tend to spend their assets at a faster rate, with a 1% greater decline in wealth over six years for each additional £10,000 of wealth, all sections of society are on average, underspending in retirement.
Tom Selby, senior analyst at AJ Bell, commented: “This research paints a fascinating picture of the way people spend – and in many cases don’t spend – their financial assets as they get older. Such thrift will be perfectly sensible in some circumstances, particularly where individuals have relatively small savings pots and choose to hold onto the money to cover any unexpected bills.
“Equally, others will be leaving significant assets untouched in case they need to pay for long-term care as they grow older, while some will simply prefer to pass assets on to loved ones rather than spend them while alive.
“That said, it is likely some of these people are overly worried about running out of money during retirement and are underspending as a result. Such reckless conservatism has been identified as a problem in the Australian pension system and may well prove to be a central issue for UK policymakers to address following the introduction of the pension freedoms in 2015.”
The IFS said the result of bequeathing wealth will have direct implications for younger generations which are likely to inherit the majority of their parents’ current financial wealth. Given wealth inequality, some individuals will inherit little, while others will inherit substantial sums.
Rowena Crawford, associate director at IFS and author of the report, said: “This will have implications for the level and distribution of resources among current working age individuals, particularly those with wealthy parents and few siblings. Given the increased freedom people now have over how they spend their pension wealth in retirement, carefully monitoring how the use of wealth evolves in future will be important, both for the living standards of the retirees themselves and also for younger generations.”
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