Homeowning pensioners are more likely to spend more of their money earlier in retirement than renters, according to a new report, before cutting back in later life.
Research from academics at the University of Bath and pension consultants LCP found that retirees who owned their own home spent more on luxuries in the first few years of retiring, whilst those who rented from a social landlord tended to have flat spending throughout their retirements.
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Their spending was also lower than those who owned their home.
The analysis looked at data from between 1968 and 2019 but found that this behaviour was particularly prevalent among recent retirees.
It found it is far more common for pensioners to own their own home than to rent, but experts predict that this could change in the coming decades.
Homeowners currently make up around three-quarters of the pensioner population, according to the report Downhill all the way? What should pension schemes assume about pensioner spending through retirement?
Its findings suggest that, for pension providers, they should not have a one-size-fits-all approach to retirement but should try to find out more about their members before allocating them to a default pathway.
For individuals it means that they need to consider in their financial plans whether they are likely to want to frontload their spending (as most homeowners now do), and that will influence the type of financial products they choose.
Helping pensioners make choices about spending in retirement
According to a report from the Pensions Policy Institute, the number of households renting in retirement could rise to 3.6 million by 2041, of whom 1.7 million would live in the private rented sector. This would be around 1.2 million more than today.
Savers are largely left to their own devices as to how they draw on their pension pot through retirement, but legislation shortly to be presented to Parliament will place a legal duty on pension providers to offer a “default” post-retirement journey.
This will shape how retirees draw money out of their pension if they make no active choices, and the researchers say their new report can help to inform the preferences of pensioners, helping providers to offer this journey.
Sir Steve Webb, partner at pension consultants LCP and one of the authors of the report, said: “The starting point for designing post-retirement products should be analysis of what pensioners actually spend.
“This data provides startling evidence of the diversity of pensioner preferences and in particular that homeowners strongly prefer to spend more of their retirement wealth in the earlier part of their retirement, whereas renters may want and need a steadier income.
“The more that providers can find out about their savers, the more the post-retirement journey can be tailored to be a good fit for different groups of pensioners.”
Most people now retire with a state pension, which provides a steady and increasing income each year, plus one or more defined contribution (DC) pension pots.
They can take 25 per cent of these pots as a lump sum tax-free and then either draw down from them throughout retirement, or buy an annuity – a regular income.
They can also choose to pay an annuity with some of their savings and keep the rest in their pot for drawdown.
Dr Ricky Kannabar, senior lecturer at the University of Bath said: “This research underlines the importance of understanding how pensioner spending changes across cohorts.
“In particular, pensioners are not a homogenous group and analysis by housing tenure highlights large differences in the spending levels and behaviour exhibited by each group.
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