Pensioners tend to ‘frontload’ their expenditure in retirement, new research by the University of Bath and consultancy LCP has found. However, it warns that providers will need to analyse their particular pensioner population, as no solution works for everyone.

LCP said there is limited evidence about the trajectory of spending in retirement ahead of pension funds being mandated to offer default decumulation options, potentially leaving providers unsure about how to structure this.  

Together with the University of Bath, it has published a new report, ‘Downhill all the way?’, looking at the spending patterns of over 100,000 pensioners collected over more than half a century. Segmenting pensioners by birth cohort and housing tenure, the analysis suggests that those renting from a social landlord tend to have relatively flat real spending, which is relatively low. Homeowners, who currently make up about three-quarters of the pensioner population, tend to front-load their spending.  

“Our key conclusion is that a ‘one-size-fits-all’ approach to pension decumulation is unlikely to be a good one,” the report notes. “Our analysis suggests that providers should be customising their defaults based on key characteristics of their members, and that the needs of homeowners in particular may be very different to those living in rented accommodation in retirement.”  

The researchers found that the downward slope for homeowner spending becomes more noticeable among the most recent retirees and is driven by spending on luxuries. 

“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,” LCP partner Sir Steve Webb said about the findings.  

Ricky Kanabar, a senior lecturer at Bath University, said the 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,” Kanabar said.  

However, he stressed that further research on the determinants of pensioner spending in retirement and how this has changed over time is needed to adequately inform the design of drawdown products. 

Aida Garcia Lazaro, a research fellow at the university, highlighted that the research also reveals how becoming a widow or widower lowers income and increases spending per head.  

She stressed it is important to consider how and when changing from a two-person to a one-person household affects spending, “particularly in the context of recent changes to state pension inheritance rights and the rising age at which individuals experience widowhood”.  

Providers will be among those who will design the decumulation products offered by pension funds.  

Claire Altman, managing director for individual retirement at Standard Life, said the assumption previously was that spending would be higher in early retirement, with a dip as people got older and another increase as spending increased due to things such as care costs.  

 

“However, LCP’s report highlights that there is no ‘one-size-fits-all’, with spending patterns dependent on factors such as home ownership or if someone has lost a spouse or partner in retirement,” Altman said. 

  

Decumulation strategies that factor in a mix of different retirement income solutions “can often be the best way forward”, she said. “These allow individuals to meet any fixed costs through an element of guaranteed income, plus solutions such as smoothed funds that provide the opportunity for investment growth whilst mitigating the impact of market volatility.”

What do you expect default decumulation options to look like?
 

Gerald Wellesley

Andrew Cheseldine

Jeremy Coomber

Anne Sander