There are “major” differences in retirement spending patterns between homeowner and renter pensioners, research from LCP and the University of Bath has found, highlighting the need for more tailored post-retirement income strategies.

The report, Downhill all the way?, analysed data on the spending patterns of over 100,000 pensioners to understand how retirees use their income and inform the design of default retirement journeys.

The report found that homeowners, who make up around three quarters of the pensioner population, typically frontload their spending in retirement, especially on luxury items, which decline sharply as they age.

The research also found that from the period of 1968 to 2019, homeowners were more likely to frontload their spending than social tenants, with the downward slope for homeowner spending becoming particularly noticeable amongst the most recent retirees.

In contrast, pensioners renting from social landlords tend to exhibit relatively flat spending patterns across retirement, with lower overall expenditure than their homeowner counterparts.

This difference has significant implications for how retirement income products should be designed, the research suggested, especially as legislation shortly to be presented to parliament will place a legal duty on pension providers to offer a ‘default’ post-retirement journey, shaping how retirees draw money out of their pension.

LCP partner, Steve Webb, said: “The starting point for designing post-retirement products should be analysis of what pensioners actually spend. 

“This data provides startling evidence of the diversity of pensioner preferences and, in particular, that homeowners strongly prefer to spend more of their retirement wealth in the earlier part of their retirement, whereas renters may want and need a steadier income.

“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”.

The research also showed that the state pension will provide the majority of retirement income for most current DC pensioners, with current legislation ensuring that the state pension rises in real terms.

However, the current system leaves many retirees to manage their pension drawdown without structured guidance, something the new legislative proposals aim to address.

University of Bath senior lecturer, Ricky Kannabar, emphasised that pensioners are not a homogenous group and there are large differences in the spending levels and behaviour exhibited by each group.

“The research underlines the importance of understanding how pensioner spending changes across different cohorts," he said.

Therefore, he argued 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.

Additionally, University of Bath research fellow, Aida Garcia Lazaro, highlighted how life events such as widowhood can affect income and consumption patterns in retirement, particularly in the context of recent changes to state pension inheritance rights and the rising age at which individuals experience widowhood.

“Further research is needed to identify other key factors to differentiate pensioners. Our work will help inform policymakers to design more evidence-based policies,” she added.

The research warned against a ‘one-size-fits-all’ approach to designing post-retirement defaults, indicating that how income is drawn from pension pots by default should be tailored as far as possible by providers to reflect the diverse preferences and needs of different pensioners.

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