Pensions are often considered a controversial topic, especially when changes are made to them by the government. It has recently been noted that the baby boomer generation has become far wealthier as a result of the higher incomes they are receiving from their pensions.
The ONS highlighted the growing inequality between working households and pensioners of this generation, but could the gap continue to widen? Here are some thoughts.
Private and Workplace Pensions
Over the last 40 years, the surge in private and workplace pensions has contributed towards a significant increase in pensioners’ incomes, which means that baby boomers are enjoying a comfortable retirement with plenty of disposable income. In fact, the disposable income of retired households grew at 2.8% per year since 1977, compared with only 2.1% per year in non-retired households.
Final-salary pensions, which are now being phased out, have largely contributed towards the significant increase in pensioner income, and this may be seen as one of the main causes of the income inequality.
There have been significant changes to pensions in recent years, and these are also likely to contribute towards uncertainty over the future of pension incomes. The triple lock has come into question, which may threaten the state pension’s future strength.
The maximum amount people can save in a pension has also been reduced, and since the 2008 financial crisis wages have been stagnating, meaning people cannot afford to save as much. This will likely only serve to widen the inequality gap, given that it is no longer an even playing field between those working and those who are retired.
For those who are still working, this situation is likely to seem frustrating, as they will be working longer and potentially receiving less for their efforts. Although there are slightly more investment options for them, it is hard to imagine how they will manage to reach the same level of income enjoyed by retirees today.
That being said, financial planners like Tilney exist to help people to make the most of their retirement savings by helping them choose the most promising investments for their budget. This could lead to a generation of people choosing pension options which give them more choice over where their money is invested (such as in a SIPP).
There is clearly inequality between the incomes of the baby boomer generation and the workers of today. For now, it seems, the younger generation may well have to get by on a slightly more meagre income come retirement, but in this uncertain economic climate there could well be further changes to pensions in the future.