A fifth face large income falls on retirement

A recent report from the Institute for Fiscal Studies (IFS) has found that one in five people experience a large income fall on retirement.

The study used household survey data to investigate how well prepared for retirement individuals approaching the state pension age are.

Looking at the income that households get from their state and private pensions then the IFS believes there is some cause for concern.

On this narrow definition of retirement income, on two commonly used measures of adequacy the IFS estimates that:

• The majority of people currently aged between 50 and the State Pension Age will have a replacement rate of less than 80%. That is they will see their income fall by at least 20% on retirement;
• More than 40% will have a replacement rate less than two thirds. They will see their income fall by at least a third.

However, focusing only on pension income ignores the fact that many households could fund their retirement from sources other than pensions. These sources include savings, expected inheritances, pension credit and the return that owner-occupiers get from living in their homes.

Using this broader definition of income, the IFS found that:

• A large majority of those aged between 50 and the State Pension Age, 80%, should actually achieve a replacement rate of 80% or better. So only a fifth see their income fall by more than 20%;
• As many as 90% could achieve a two thirds replacement rate.