The horrible squeeze killing retirement incomes

Retirement income squeezed

Millions of pensioners are facing a hidden squeeze on their incomes, which could spell disaster for their retirement plans.

What's even worse is that if they have failed to adjust their spending to take account of the squeeze, they may unwittingly be storing up a financial nightmare for later in their retirement.

SEE ALSO: Private pension income gap widens, figures show

See also: Hotspots for retiring overseas

The advent of pension freedoms gave pensioners more freedom to generate at least part of their retirement income from the returns on savings and investments - rather than buying an annuity. While this allowed them the freedom to tailor their income to their needs, it also exposed them to new risks.

With a decade of rock bottom interest rates, some of those risks are coming home to roost - and devastating retirement incomes.

The impact of rates

It has been ten years since the last Bank of England interest rate hike, and savings rates are at rock bottom. While once pensioners could look forward to double-digit interest on their savings, now they have to hunt high and low - and jump through endless hoops - to get more than 1%.

As a result, their incomes have suffered significantly. According to analysis by Key Retirement, for the tax year that ran from 2007 and 2008 - before the credit crunch - the average married retired household made £2,650 a year from investments and savings - which was around 11% of their retirement income. This year, while inflation has pushed the cost of living up, savings and investment returns have fallen to £2,200 a year. It contributes just 8% to the average married retired household's income.

These are just the averages too: if a couple has more of their money in a savings account and less in investments, they are likely to be suffering even more.

Dean Mirfin, technical director at Key Retirement said: "The squeeze on saving and investment income is a major issue for retired households and it is worrying that pensioners are still earning less than they did in 2007/08. The stock market has recovered and grown strongly since then but pensioners who mainly rely on cash savings are not seeing the benefits as rates have been at historic lows for more than eight years now. Even for those whose pensions have been invested through these stock market improvements many, if near to retirement, will have seen little benefit if their funds have gradually been managed through to predominantly cash to preserve benefits in the lead up to retirement."

To make matters worse, if pensioners are maintaining their income by eating into their savings or withdrawing cash from investments, it will mean they have even less money generating an income for them in future, so their returns for the following year will be even lower, and they will be forced to withdraw even more of their cash. This pattern repeats every year, with more and more of the savings being eroded each time, until there's nothing left.

What can you do?

It goes to show how important it is to take stock of retirement income on a regular basis, so you can see the squeeze clearly, and you don't accidentally keep eroding your savings without realising it.

The best solution to the squeeze will be different for each household. In some cases it means making even more cuts to spending. This gets trickier each time income is squeezed, but shopping around for everything from utilities to groceries can make a big difference.

For those with the risk tolerance, it may mean moving more of your money out of cash savings and into investments - as long as you can cope with the volatility that comes with the potential for additional growth.

In other situations it makes sense to take on some part time work to make up the shortfall - either finding a job, or considering how you can make money from your skills and hobbies.

In some cases your home can help solve the issue - either by renting out a room, downsizing or using equity release.

The complexity of this kind of decision means you may want to take advice, so you can track down the best solution for your circumstances, and be aware of all the implications.

None of the options will be desperately appealing, but all of them will be better than watching your savings being whittled away - giving you nothing to live on in the final years of retirement.

How we spend our pensions
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How we spend our pensions

Figures from Saga show that the over 50s now account for the majority of money spent by Brits on travel and tourism. They have the time to spare, the money, and they are healthy enough to take on the world.

A poll from Abta found that in the wake of pension freedoms, 35% of people were considering cashing in at least part of their pension to travel. A separate study by Senior Railcard found that pensioners take an average of three holidays a year, plus two weekends away, and 17 day trips.

Research from Senior Railcard found that retirees eat out an average of three times a month. However, one in ten do so more than twice a week, and one in three people said that one of the first things they did when they retired was to go out for lunch with their friends.

Of course, just because retirees want to enjoy themselves, it doesn't mean they are happy to throw money away. The vast majority are keen to eat at lunchtimes, when a fixed lunch menu tends to be cheaper, and canny retirees are skilled at tracking down pensioner special offers too.

Figures from the Office for National Statistics show that on average nearly a fifth of the money spent by people aged 65-74 is on leisure. This includes everything from the cinema and theatre to golfing and gardening. They spent more on this than on food, energy bills and transport.

A report by Canada Life found that retirees are spending £4,279 a year on having fun - that’s more than £1,000 more than they spend on boring essentials, and is a 74% increase over the past ten years. It went on to predict that this trend was set to continue, and that pension freedoms would encourage people to spoil themselves a bit more in retirement

Pensioner property wealth is now over £850 billion, and all these family homes don’t look after themselves. The Senior Railcard survey put home renovations in the top 20 activities people got stuck into on retirement, and figures from ABTA found that almost a third of people who were considering raiding their pension pots under the new pension freedoms planned to spend the cash on their home. This seems like an eminently sensible investment - looking after what is undoubtedly their most valuable asset.

Unsurprisingly, while some pensioners are very well off indeed, others are struggling with debt. Figures from Key Retirement found that the average retiree has £34,000 of debt.

Most of this is mortgage borrowing - in many cases driven up by the number of people who unwittingly signed up to an interest-only mortgage. However, credit cards, overdrafts, and loans are also common. It’s why so many pensioners have used pension freedoms to access enough cash to pay their debts.

The day to day basics are swallowing up their fair share of pensioner cash too. On average, people aged 65-74 spend a third of their weekly income on essentials like food and bills - which is hardly living the high life.
The bank of gran and grandad has become an increasingly vital source of cash for families. According to Key Retirement, of those who release equity from their property, 21% of them use the cash to treat their children and grandchildren. This includes an average of £33,350 to help children get onto the property ladder, £6,000 to buy them a new car, £11,000 on family weddings, and £24,780 giving grandchildren a helping hand.

While retirees are quite rightly spending what they need to enjoy retirement, they are hardly all throwing caution to the wind, buying flash cars and spending the kids' inheritance.

Most expect to have something left over to pass onto their family after their death. Some 69% expect to leave property in their wills, and 75% expect to leave cash - according to - because while baby boomers know how to have fun - they also know how to save for the future.


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