Mind the Generation Gap. Brewin Dolphin Family Wealth Report. Part 1 The Baby Boomers

Transcription

1 Mind the Generation Gap Brewin Dolphin Family Wealth Report Part 1 The Baby Boomers

2 2 Disclaimer Whilst every effort has been made to ensure the accuracy of the material in this document, neither Centre for Economics and Business Research Ltd nor the report s authors will be liable for any loss or damages incurred through the use of the report. Authorship and acknowledgements This report has been produced by Cebr, an independent economics and business research consultancy established in The views expressed herein are those of the authors only and are based upon independent research by them. The report does not necessarily reflect the views of Brewin Dolphin. Please note we believe the information contained in this document to correct at the time of writing. Nothing in the report constitutes tax or legal advice. While we believe the information to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law and tax thresholds are subject to frequent change. Tax treatment depends on people s individual circumstances and should not be relied upon to make financial decisions without seeking professional advice. London, November 2016

3 3 Table of Contents 1 Executive Summary 5 2 The UK saving crisis Expectations and reality the implications of undersaving 7 3 Using the silver pound to help solve the savings crisis The rising wealth of the over 55s Supporting the family thinking beyond inheritance Equity release a viable solution? Planning and the role of financial advice 15 4 Conclusions 18

4 4 Foreword The UK has a savings crisis and as things stand it s only likely to get worse. The younger generation is simply not putting enough money aside for retirement. But rather than just urge younger people to save more, we think a potential solution could lie with the older generation. Wealth is overwhelmingly concentrated in the older generation. Older people are generally very willing to leave their wealth when they die to their children and grandchildren. But we believe that more of the older generation should look at ways of passing on wealth while they are still alive. There is significant potential for older people to improve the financial position of their children and grandchildren, without compromising their own retirement plans. Gifting money to a younger relative to top up their pension plan can substantially boost their income when they eventually retire. And paying into an ISA for a youngster can provide them with a useful financial head start in life. Another benefit is that gifting wealth while you are still alive can save inheritance tax. Of course, many older people may be reluctant to pass on wealth now because they don t know whether they will need it in the future. As one of the UK s leading wealth managers, Brewin Dolphin can help work out your potential financial needs in retirement and if you are in a position to be making financial gifts. Our experts will build a tailor-made plan that makes things clearer and gives older people the confidence to help their family now. Having worked with families for over 250 years, we are firm believers that the families that do best are those that plan ahead. David Nicol Chief Executive Brewin Dolphin

5 5 1 Executive Summary The financial crisis has changed savings and financial patterns across age and incomes groups. People all over the UK are facing a myriad of financial challenges and becoming increasingly concerned about the state of their finances both now and in the future. Cebr was commissioned by leading UK wealth manager, Brewin Dolphin, to undertake a significant piece of research examining the important trends in wealth, income, saving and lifestyles across income and age groups based on a wide range of official datasets and a detailed survey of 11,000 people. The report examines the financial challenges affecting people in the UK, particularly around the issues of saving for later life and, in consultation with financial planning experts at Brewin Dolphin, considers the behavioural changes that could be made to ensure that more individuals achieve their desired lifestyles upon retirement. Numerous findings in the report are concerning, and suggest a detachment between expectations and reality that spans across generations, regions and income groups. This report, the first part of the research, examines the size of the savings shortfall that exists in the UK and considers the ways in which the current generation of over 55s can use their wealth in a more active and efficient way to improve the future life chances of their loved ones. The key findings of the research include: 1. Saving is out of fashion in the UK. UK households save only 6p for every pound against 15p in 1992 and even the higher income groups think they don't have enough spare cash to save. Alarmingly, a quarter of the UK doesn t save at all. For younger generations this means they are struggling to accumulate sufficient wealth to buy a home or enjoy a comfortable old age. 2. Most people know that they are not putting enough money aside for retirement: 55% of the population (and 43% of those with incomes above 50,000) think they do not put enough money aside for retirement, citing lack of spare cash as the main reason. 3. The poorest and some of the most well-off have remarkably similar hopes for their pension pots: those with household incomes between 10,000 and 70,000 think an annual pension of 21,000 to 28,000 is ok though the young tend to have higher figures in mind than the old, who perhaps grow increasingly disillusioned by their prospects. 4. People are saving woefully less than they think is the minimum they will need for a comfortable retirement and they greatly underestimate how expensive annuities are: For example, those earning 40-45,000 believe their savings will cover around 70% of what is required for their desired retirement income. In fact, they are saving only 30% of the actual sum needed. Those aged 18 to 44 say they will need an inflation-adjusted income of 30,000, about 8,000 of which is expected to come from the state pension system. The size of the pension pot necessary to buy an annuity which generates the differential income of 22,000 per year is approximately 725,000 at current rates. 1 However, the Brewin Dolphin research reveals that the expected average pension pot of that age group is only 175,000 at retirement, leaving a massive funding gap of 550,000. Annuity rates, even if they rise from current levels, are likely to remain much lower than in the past given the likely persistence of very low interest rates meaning that the funding gap is highly unlikely to correct itself. The fact that people believe that a pension pot of 299,000 would be sufficient for their target income at retirement reveals a worrying lack of financial planning in the population. 1 Model calculation based on an inflation-linked annuity, taken out at the age of 65 for a healthy single, non-smoker, without dependents or a guarantee period, not taking out a tax-free sum.

6 6 5. Over 55s feel far more financially secure than younger age groups as many families in the UK have managed to accumulate sizeable wealth over the past decades.: 41% of over 55s describe themselves as comfortable against 26% of year olds. 6. Although many older people want to make sure their children and grandchildren are financially secure,only 2% of individuals aged 55 and above would consider gifting their children money to top up their pension or have done so in the past: One explanation for this could be that family members prefer to contribute towards a more emotional investment such as a car, the first home or a wedding ceremony. However, from a financial point of view contributions towards a pension plan or other investments could be much more valuable due to compounding interest income. 7. Only 4% of people will sell their homes to support their retirement or help other family members: Brits cling to the ideal of providing their families with as large an inheritance as possible, even though equity release would help their children and grandchildren at an earlier and perhaps more beneficial stage of their lives. Addtionally, homeowners should also consider inheritance tax liabilities when thinking about the right time to pass on their estate to the next generation. 8. Financial advice can help but hardly anyone is willing to pay for it: Of the 11,000 individuals surveyed as part of this research, 85% said they had never paid for financial advice, of which more than 40% argued they don't have enough money or assets to justify paying for expert help. Yet many will have indirectly paid for advice through commissions and consultation fees historically embedded in most financial products, from mortgages to pension plans. What Can Be Done? There is significant potential for the over 55s to improve the financial position of their children and grandchildren, without undermining their own retirement plans. Our research suggests that at present there is a far greater willingness for older generations to leave an estate to children, than to provide ongoing financial gifts. This is despite the fact that gifting could support relatives at a younger life stage, enabling them to accumulate assets (and benefit from compound returns on these assets) at an earlier life point. Further, only 2% of over 55s would consider supporting a relative by putting money into a pension fund. Parents are far more likely to provide support for a wedding or house purchase. Although less glamourous, the pensions of younger relatives should not be overlooked when it comes to financial support. The high levels of property wealth among the current generation of over 55s could potentially be unlocked to provide financial support for retirement and for helping relatives. Equity release is a potentially underutilised means of accessing cash and reducing inheritance tax liabilities. Attitudes to financial advice need to change. Despite the fact that many individuals know they are not saving enough, very few have ever paid for financial advice something that holds true across age groups and even income groups. There is significant potential for financial advice to be used to enable the over 55s to make better use of their wealth to support themselves and their families.

7 7 2 The UK saving crisis Official data show a sharp decline in household saving rates in recent years which is set to leave households with a significant financial shortfall upon retirement. UK households save only 6p for every pound against 15p in 1992 and even the higher income groups think they don't have enough spare cash to save. At the same time, structural changes such as the shift from defined benefit to defined contribution pensions have created further challenges for younger generations who are planning for retirement. The survey of 11,000 individuals undertaken as part of this research shows that one in four people in the UK do not save at all and a further 18% save less than 5% of their net income. Figure 1: Saving as a share of net income full sample 40% or more 35% to 39.9% 30% to 34.9% 25% to 29.9% 20% to 24.9% 15% to 19.9% 10% to 14.9% 5% to 9.9% 1% to 4.9% 0.1% to 0.9% 0% - nothing Don't know 0% 5% 10% 15% 20% 25% 30% Source: YouGov survey commissioned by Brewin Dolphin 2.1 Expectations and reality the implications of undersaving Individuals in the UK, particularly younger individuals, have expectations of retirement income that are likely to be highly unachievable at prevailing rates of saving. In our research, we asked people what minimum annual income (in today s prices) they would find suitable to live a comfortable lifestyle in retirement. Looking at the age split of the responses reveals an interesting pattern: younger people have a significantly higher expectation of pension income than older generations. 18 to 24 year-olds stated that their minimum income for a comfortable lifestyle would be just under 35,000. The average minimum retirement income falls for the following age groups until it stabilises at just under 25,000 for 45 to 54 year-olds and those aged 55 and above. Several explanations for this could be possible: younger people might be more optimistic about their (financial) future. With most of their careers ahead of them, they might be more ambitious about their

8 8 future income path both in their working life as well as in retirement. The other side of this argument is that as people grow older, a sense of disillusionment sets in as they realise that previous plans for their retirement income are not realistic. A less negative reading of the result could be that people simply become more realistic about their income needs in retirement and realise that many of the fixed costs that people incur in the middle of their lives no longer need to be taken care of at older age such as mortgage payments or supporting adolescent children. Apart from the age split of the data it is also worthwhile to see how expectations of minimum retirement income differ by income groups, shown in Figure 2. Figure 2: Average expected minimum annual retirement income for a comfortable lifestyle, by household income groups 60,000 50,000 40,000 30,000 20,000 10,000 - Source: YouGov survey commissioned by Brewin Dolphin It is striking that expectations about the minimum annual retirement income sufficient for a comfortable lifestyle vary much less than incomes do. Average desired retirement income of respondents with household incomes from 10,000 to 70,000 is less than 7,000 apart, ranging from around 21,500 to 28,000. For higher income groups expectations about pension income escalate quickly, rising to over 41,000 for those with household incomes between 100,000 and 150,000 and to almost 60,000 for those on higher incomes still. We asked about the amount that people think will be in their pension pot at the age of retirement. This serves to contrast expected pension incomes with the plans that people have actually made to accumulate enough capital from which to draw this income.

9 Pnesion pot size 9 Figure 3: Expected size of pension pot for desired lifestyle at retirement and actual pot necessary, by household income group 2,500,000 2,000,000 1,500,000 1,000, ,000 - Expected size of pension pot at time of retirement Expected size of pension pot necessary to provide target requirement income Actual size of pension pot necessary to buy annuity for desired annual retirement income Source: YouGov survey commissioned by Brewin Dolphin Pension pot size calculated based on current inflation-linked annuity rates for a healthy single, retiring at age 65, not taking out a tax-free sum, excluding a guarantee period Figure 3 shows the gaps between three different pension pots. The green bar represents the expected size of peoples pension pots at retirement, i.e. how much people think they will have saved up to the age at which they plan to retire. As expected, the pot size increases with income group: higher earners expect to hold a bigger pension pot at the end of their working life. People in households with a gross income of 30,000 to 35,000 a year on average expect their pension pot to hold around 135,000 whereas those with incomes over 150,000 expect to have just under 850,000 set aside for retirement.

10 10 The grey bar to the right of it shows the amount people think they need in order to be able to buy an annuity which would pay for a comfortable lifestyle in retirement. Here we already see a striking divergence between the pension wealth people expect to accumulate over the course of their lives and what they think they actually need to lead the lifestyles they want. The average gap for the income groups shown in Figure 3 is 36% of the desired pension pot size. The relative size of the gap is bigger for lower income groups: those with household incomes of 30,000 to 35,000 expect to hold just over 50% of the pension wealth which they think necessary to finance a comfortable lifestyle. But also for those earning between 70,000 and 100,000 the gap is still more than 30%. People clearly know they are under-saving, but the striking finding is just how much they are underestimating this issue. We compared these estimates of expected and desired pension wealth with the actual pension pots required to finance the desired lifestyle. These pot sizes, pictured as the light blue bars in the figure above, are based on current annuity rates for a healthy single taking out an inflation-linked annuity at the age of 65 without a guarantee period. These pot sizes are required to finance the desired annual retirement income, as pictured in Figure 2, after accounting for contribution from state pensions. Here we see vast discrepancies between the actual required size of the pension pots and peoples expected savings as well as their idea of the necessary amount of money they would need to save. In other words, the graph shows: People are saving less than what they think is the minimum amount necessary for a comfortable lifestyle in retirement. People vastly underestimate the size of the pension pot necessary to pay out an annuity which covers their desired retirement income. The average pension pot expected at retirement for those aged 18 to 44 stands at 175,000, however, they would need around 725,000 2 in order buy an annuity that delivers their target income of an additional 22,000 per annum on top of the State Pension. The average funding gap for retirement in that age group therefore stands at a staggering 550,000. An improvement in annuity rates from current levels could lessen the size of the savings gap, but the likely persistence of very low interest rates for the foreseeable future means that annuity rates are set to remain very low by historical standards. This suggests that undersaving is a widespread issue and that the population is generally significantly underestimating the savings gap they are facing. 2 Model calculation based on an inflation-linked annuity, taken out at the age of 65 for a healthy single, non-smoker, without dependents or a guarantee period, not taking out a tax-free sum.

11 11 3 Using the silver pound to help solve the savings crisis The previous section of this report shows a substantial problem of undersaving in the UK, across age groups and income groups. Expectations for retirement income are far in excess of what is feasible given prevailing saving and annuity rates, and although many individuals are aware of the fact that they are not saving enough, most drastically underestimate the extent to which this is the case. Here we explore whether the older generations can make better use of their wealth to improve the savings positions of their loved ones, while at the same time minimising their tax burden and ensuring that they retain sufficient funds to finance their own retirements. 3.1 The rising wealth of the over 55s Official data show a substantial rise in the wealth of the over 55s in recent years. Data from the Office for National Statistics (ONS) show that older people are increasing their share of total household wealth in the UK while younger generations are falling behind. In our survey of 11,000 individuals, 40% of over 55s describe themselves as comfortable against 26% of year olds. Figure 4: Distribution of total wealth between age cohorts: 12,000,000 70% 10,000,000 60% 8,000,000 6,000,000 4,000,000 2,000,000 50% 40% 30% 20% 10% Aggregate wealth ( million) year-olds 55+ 0% Source: ONS, Cebr analysis In part, the rising wealth of the over 55s reflects demographics and the fact that there is a growing number of older people. But it also reflects the fact that older generations generally benefited from being able to purchase property at a time when house prices were far more affordable. In % of 65 to 74 year-olds were home owners. On the latest data it is close to 80%. At the same time, homeownership rates have declined drastically for younger generations as house price growth has far outstripped growth in average earnings in recent years.

12 12 Figure 5: Share of home owners by age cohort, % / / Source: English Housing Survey, Cebr Analysis Also in terms of income growth, pensioners today are much better off than previous generations and also than many working households. Research from the Institute for Fiscal Studies has shown that for the first time pensioner median incomes surpassed non-pensioner median income in after accounting for housing costs. 3 This is the result of steadily rising pension incomes since the 1990s and years of declines in real income for working households in the wake of the financial crisis. Amid high levels of property wealth and financial wealth, there is potential for the over 55s to use their financial means to improve the saving and wealth positions of younger family members who are struggling in a challenging economic climate of low interest rates, unaffordable house prices and defined contribution pensions which carry significant uncertainty over retirement income. 3.2 Supporting the family thinking beyond inheritance Older generations can support their children, grandchildren and other relatives through divesting the wealth that they have been able to accumulate over the years. Depending on how this wealth is then invested or spent, younger generations can in turn benefit from an improved lifestyle in both the present and the future. Many individuals support their family through leaving an estate when they pass away. Indeed, our research suggests that this is the most commonly used form of financial support for relatives, with 68% 3 Institute for Fiscal Studies Living standards, poverty and inequality in the UK: 2015

13 13 saying that they would support family in this way. Just over half (52%) intend to support family with help on one-off costs (such as weddings and house deposits). Figure 6: In which, if any, of the following ways do you intend to provide your immediate family with financial support? (Please select all that apply) 80% 70% 60% 50% 40% 30% 20% 10% 0% Leaving them all/ part of my assets in my will Supporting them with one-off large costs (e.g. weddings, home deposit or rent etc.) Providing them with on-going financial gifts/ support (e.g. an annual/ monthly sum of money) Other Don't know Source: YouGov survey commissioned by Brewin Dolphin Only a third (34%) would help their family by providing ongoing gifts (e.g. an annual sum of money). This is despite the fact that there could be some clear benefits from providing ongoing financial support to younger relatives, for example helping them to set aside money each year to go into a pension fund or invest in other ways. Supporting capital accumulation at a younger age brings a wide range of benefits to younger individuals, as they can benefit from compound interest and compound returns on investments something that might not be achieved in the case of an inheritance received in later life. In addition to this, such an approach can bring with it some tax benefits, with regular gifting helping to reduce inheritance tax liabilities. When it comes to gifting, individuals should start thinking beyond the obvious property, cars and weddings. Although far less glamourous to the average person, helping younger relatives by providing money to go into a pension fund could be a crucial form of financial support in the future. Yet our survey shows that less than 5% of individuals have or would provide support to a relative with respect to their pension fund. For the over 55s, this figure is just 2%.

14 14 Figure 7: For which, if any, of the following reasons have you/ would you ever provide financial support to ANY family members? (Please select all that apply) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% To buy their first For their wedding home or civil partnership Care costs (e.g. for an elderly relative) Major purchases other than property (e.g. a car) To contribute to a pension fund To purchase equities, bonds and/ or other financial assets Source: YouGov survey commissioned by Brewin Dolphin 3.3 Equity release a viable solution? For individuals who have reached or are approaching retirement, and lack the required pension wealth to generate a significant income, equity release can be a valid option, depending on circumstances. By unlocking equity in property, individuals can improve their retirement income without having to downsize. Alternatively, equity release can be utilised as a way of older generations financially supporting younger generations. Not only is there potential to provide younger individuals with more financial support at an earlier life stage, but equity release can help reduce tax liabilities for individuals by curbing future inheritance tax payments. Our survey research shows that equity release is at present an underutilised source of raising capital to support retirement and help other family members. Just 4% of survey respondents intend to use equity release to fund retirement at present, lower than any other option in the survey.

15 15 Figure 8: In which, if any, of the following ways will you fund your retirement? Using my state pension With a workplace pension Using my savings By continuing to work in retirement Using inherited money/ property By downsizing my main property With a private (i.e. non-workplace) pension With buy-to-let property income Engaging in equity release on my main property 0% 10% 20% 30% 40% 50% 60% 70% Source: YouGov survey commissioned by Brewin Dolphin 3.4 Planning and the role of financial advice Despite a seeming lack of knowledge about the extent to which individuals are underprepared for the future, there is a significant unwillingness for individuals to pay for financial advice that can increase their knowledge of the challenges that they will face, as well as solutions to these challenges. Of the 11,000 individuals surveyed as part of this research, 85% had never paid for financial advice, a figure that remains high across age groups and income groups. Even among those with household incomes of 150,000 or more, 70% had never paid for advice. Among those aged under 35, who face some sizeable economic challenges in the post-financial crisis world, about 90% have never paid for financial advice. But even for the over 55s, close to 80% have never paid for financial advice, despite some of the complexities around optimal financial planning to reduce tax, manage retirement income and provide support to family members.

16 16 Figure 9: Have you ever paid for financial advice? Proportion answering no, by age group and household income group 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: YouGov survey commissioned by Brewin Dolphin The survey reveals that the two most commonly cited reasons for not paying for financial advice are that individuals do not feel that they have enough wealth to justify paying for advice, and that individuals simply feel that they do not need financial advice despite the fact that the same survey shows that most individuals concede that they do not think that they are saving enough for retirement. Figure 10: Why have you never paid for financial advice? 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Other I don't know where to find it/ who to go to Don't know I don't trust financial advisors Financial advice is too expensive I use free financial advice/ guidance I don't think I I don't have need enough financial wealth/ advice assets to justify paying for the advice Source: YouGov survey commissioned by Brewin Dolphin

17 17 The survey revealed that the lack of trust in financial advisors is one of the less common reasons for not paying for financial advice. Just 15% of survey respondents said this was a reason why they had never paid for advice. Therefore, increased take-up of financial advice could play a key role in improving the wealth position of UK households, both by increasing awareness of issues such as undersaving and providing individuals with possible solutions to the financial issues that they may be facing. The fact that lack of trust is not an issue for the most part is encouraging, and the survey suggests that the best way of increasing take-up of financial advice is to provide cost effective solutions that are suitable for individuals with relatively modest levels of wealth.

18 18 4 Conclusions This report has examined recent trends in saving and spending patterns as well as people s preparedness for retirement. It highlights a worrying disparity between aspirations for future wealth, and the likely reality. Millions of households in the UK are saving too little for retirement, often knowingly so. But even those accepting that they are not saving enough tend to underestimate the size of their savings shortfall. The problems described in this report are particularly acute for the younger generation. A weaker economy has suppressed interest rates, meaning that overly conservative portfolios, where most of the money is held in bank saving accounts and cash ISAs, now give very low returns. At the same time, employee earnings are growing at a weaker rate than in the past and property, a route for asset accumulation, has become inaccessible for many individuals given high house prices. Ultimately, either households need to adjust their expectations for future wealth and income, or change their behaviour today to increase the chance of turning their aspirations into reality. This is certainly achievable, although it will be challenging. Older generations could potentially do more to help younger generations with these challenges, while at the same time supporting their own retirements and minimising their tax liabilities. Some conclusions that can be drawn from the research are: Save more It is clear that people need to save more in order to reach their financial goals in later life. The finding that 25% of the population don t save at all and a further 18% save less than 5% of their income is alarming. This is not purely a problem of low incomes as 14% of households with incomes between 100,000 and 150,000 save less than 1% of their net income. Rethink financial support in the family It is worthwhile to carefully analyse the way in which money is gifted in the family. The research shows that many parents are inclined to help their offspring with large one-off expenses such as weddings or helping to buy a house. However, much fewer think of supporting their children with regular contributions to a pension fund or other ways to build financial wealth. While it may be understandable that these contributions carry less sentimental weight, they often are much more useful for building wealth and ensuring financial security in the longer run, especially when they enable people to start accumulating wealth earlier than would have otherwise been the case. Get help Financial advice and education appear to be underutilised by the population: 85% of the 11,000 survey respondents have never paid for financial advice despite widespread concerns about not saving enough. This figure remains high across age and income groups. Even for the over 55s, close to 80% have never paid for financial advice, despite some of the complexities around optimal financial planning to reduce tax, manage retirement income and provide support to family members. Saving and wealth accumulation have become much more challenging and complex tasks than in previous generations. At the same time structurally lower annuity rates make it necessary to save even larger amounts for retirement than what was necessary even 10 years ago. Financial advice can help families plan their retirement and investment strategies, and navigate some of the complexities around transferring wealth from one generation to another in an optimal way.