Find out our latest news, views and video:

Retired income growth - and good old fashioned planning ahead

Average household disposable income in the UK was estimated as £25,700 in the financial year ending 2015 (2014/15). This is £1,500 higher than its recent low in 2012/13, after accounting for inflation and household composition, and is at a similar level to its pre-downturn value (£25,400).

The recent increase in disposable incomes has been driven largely by increased household income from employment, due to both average earnings growing in real terms in 2014/15 and continued growth in employment rates.

The average disposable income of the richest fifth of households fell the most following the economic downturn (7.9% between 2007/08 and 2012/13). Since then it has increased, but in 2014/15 remained £2,000 (3.2%) below its previous peak after accounting for inflation and household composition. The poorest fifth of households were the only group whose average income did not fall between 2007/08 and 2012/13 and in 2014/15 the average income of this group was £700 (5.8%) above its 2007/08 value.

Estimates of income inequality for 2014/15 are broadly unchanged from those for the previous financial year (any differences are not statistically significant). Since 2007/08, there has been a slight decrease in overall income inequality on a range of measures, although from a longer-term perspective, income inequality remains above levels seen in the early 1980s.

The average income of retired households was largely unaffected by the economic downturn and rose by 7.7% (£1,500) between 2007/08 and 2014/15. In contrast, non-retired households’ average income in 2014/15 remained 3.1% (£900) below its level in 2007/08.

The growth in the average disposable income of retired and non-retired households - taking account of inflation and changes in household composition over time - has increased since 2012/13. 

However, the pattern of change since the start of the economic downturn has been very different for retired and non-retired households. 

While incomes of non-retired households remain higher than retired households, since 2007/08, the average income for retired households has increased in most years, with the value rising to £21,000 in 2014/15, £1,500 higher than in 2007/08. 

By contrast, the average income for non-retired households decreased, and was £2,600 lower in 2012/13 than in 2007/08. Since 2012/13, the value of the average for non-retired households has risen to £28,300, but is still around £900 below 2007/08 levels (£29,200)

The growth in the incomes of retired households since 2007/08 has been driven by a number of factors. One is a rise in both the amounts received and the number of households reporting receipts from private pensions or annuities. Another is an increase in average income from the state pension, due in part to the impact of the "triple lock”1.

While the income of retired households remains considerably lower than that of non-retired households, retired households have seen faster income growth. 

After adjusting for inflation, in 1977, the average income of retired households was £7,900 and the average income of non-retired households was £14,000. By 2014/15, the income of retired households had grown 2.7 times to £21,000, while the income of non-retired households had doubled from its 1977 level to £28,300.

Retired households are those where the income of retired household members accounts for the majority of the total household gross income. 

Retired households have different income patterns to their non-retired counterparts.

Retired households are much more likely to be towards the bottom of the overall income distribution than at the top.

The sources of retired households’ gross incomes have changed over time. Overall, the proportion coming from cash benefits (including State Pension) has fallen significantly, from 64.7% in 1977 to the current level of 47.1%. 

This has mainly been due to growth in the percentage of retired households receiving income from private pensions and annuities, which rose from 44.5% in 1977 to 79.6% in 2014/15. 

In 1977, the average income received by retired households from private pensions was £1,600, accounting for 18% of the gross income of this group. By 2014/15, retired households received on average £10,300 from private pensions or annuities, equivalent to 43.0% of their gross income.

Until 1999/2000, the State Pension was consistently the largest source of income for retired households. 

Since 2010/11, private pensions and annuities have consistently contributed most to gross income of retired households. 

After allowing for inflation, the State Pension doubled from an average of £4,700 in 1977 to £9,000 in 2014/15. 

The extent to which retired households are major beneficiaries from redistribution through direct taxes and cash benefits can be further seen by comparing average incomes of the top and bottom fifths of retired households. 

In 2014/15, before taxes and benefits, the richest fifth of retired households had an average total original income of £34,700 per year. This was over 12 times that of the poorest fifth (£2,800 per year). This ratio was reduced by cash benefits and direct taxes to just over 4 to 1.

With more and more living longer, to bolster income, some retirees may decide to work longer and invest in schemes providing them with the income and security not ‘afforded’ by the state.

Perhaps the best advice to everyone without the luxury of disposable income in their dotage is to plan ahead.

One way is to adopt the habits of previous generations and strive to pay of a mortgage before retirement. This way, with a disposable asset, there will be options of living comfortably into old age without having to stay working just to survive.


Related links