Now in my forties, I find myself thinking about three generations when it comes to planning my finances. Luckily, my parents are baby boomers and comfortably retired. I lose count of the holidays they go on over the year, they’ve just returned from India. My children on the other hand won’t have those final salary pension schemes, and if interest rates don’t change it will also be easier for them to borrow money than to save it. With inflation hitting 1.8%, how do I need to change the approach to my future finances?
Pensioners earning more than workers
This week a report by the Resolution Foundation showed that UK pensioners’ incomes are now above those of the working-age population. This is across the mean, median, and lower income brackets.
This change has been some time in the making; growth in pensioner incomes accelerated in the early 2000s before the financial crisis. In fact, pensioner incomes grew by 28% between 2001 and 2009, whilst working incomes only grew by 6%.
How to build up a strong pension
The current ‘baby boomer’ pensioners enjoyed some things that past generations haven’t done before. Firstly, more people than ever were in work. That means they had access to workplace pensions, made the national insurance payments for government pensions, and may have also been able to save a little extra themselves.
Anything they managed to save will have benefitted from some rather generous interest rates. The average Bank of England base interest rate in the 1990s was about 6%, at times during the baby boomers working lives it was as high as 15% – albeit with higher inflation. That will have been great for savers, but imagine the mortgage payments.
The baby boomers also enjoyed final salary pension schemes. Home ownership was high so retired housing costs are lower for those with low or no mortgages.
What does the future hold?
The data published in the report shows a steady trend upwards of retirement income, but could the tides turn now that the pension rules have changed? With defined contribution pension schemes rather than defined benefit the onus is very much on the individual. You have to put in to get out.
Today’s savers also have to think about how they save. The Bank of England base rate is now just 0.25%, admittedly we’re not paying 15% on mortgages, but if we keep our money in cash savings accounts there aren’t any that beat the current 1.8% inflation. That means investing is becoming a necessity for many, but ensuring that you receive the right advice, and make the right choices, will be crucial for ensuring a strong retirement income.