Four out of 10 people over 50 and approaching retirement are likely to see their income fall by up to third when they stop working.
While the majority face at least a 20% cut in income, the same group has also lost 10% of their wealth due to the financial crisis, according to a new study.
The report was compiled by IFS Retirement Saving Consortium, www.ifs.org.uk/projects/303, the Joseph Rowntree Foundation, www.jrf.org.uk, and the Economic and Social Research Council, www.esrc.ac.uk, in response to fears over how much money the over 50s are likely to have available to fund their later years.
A key element of the report was many households could fund their retirement from sources other than pensions, like savings, inheritances, pension credit and the return that owner-occupiers get from living in their homes.
But the absolute levels of income will not be high, says the report, predicting one-in-eight individuals approaching retirement would retire on an income from state and private pensions of less than the Pension Credit Guarantee level of £142.70 per week for single people and £217.90 for couples.
Cormac O’Dea, a senior research economist and one of the authors of the report said: “In assessing how prepared households are for retirement, it is extremely important to take into account the fact that many households can fund their retirement from sources other than their pensions.
“Retirement resources are not the same thing as pension income. Taking into account income from state and private pensions, two-fifths of those approaching the state pension age will see their income fall by more than a third on retirement. However, using a comprehensive measure of income, the proportion facing such large income falls on retirement is just one-tenth.”
A second study by the IFS simulates how older people might have been affected by the large asset price changes associated with the financial crisis and estimates the size of some of their responses to the resulting wealth shocks.
The survey revealed that on average individuals aged 50 and over experienced a fall in their household’s gross wealth of 10% as a result of the financial crisis – a fall of almost £60,000 on average.
“The estimated losses are proportionately greater for those in wealthier households as they tended to have more of their wealth exposed to the assets that fell in price over the crisis,” said the report.
“The mean loss among the least wealthy fifth was 4.6% of total gross wealth or £9,400, increasing to 12.9% – or £162,000 – among the richest fifth. Of these losses among the richest fifth just under half comes from falls in property values, and just over half comes from a fall in funds exposed to the stock market.
“The impact on this age group may be of particular concern because they are unlikely to be able to make up the losses later in life.”