When people – how can I put this delicately? – approaching the latter stages of their working life stand up in the Karaoke bar and belt out Frank Sinatra’s My Way, it’s a little tactless to urge: “go on, mention your regrets”. But if you did, it may well be that not planning adequately for retirement will be high on the list.
Increases in life expectancy in the UK over the last 40 years have been spectacular, if stalling now, and deaths during working age have thankfully dwindled. People will typically live around twenty years after retirement from their career job, and longer for those who took early retirement, though many will take on part-time or less demanding work either because they need the money or as a way of staying active.
But with that last contrast – those who work in retirement for the money, and those who do so to stay active – we have hit on something very important: inequality in retirement. For some, retirement is a time of financial stress, hovering around the poverty line, struggling to make ends meet, often in fragile health. For others retirement is the prime of life. Inequality in retirement deserves much more attention than it has received, certainly by theorists of justice. Of course, sociologists of ageing have had the post-work period of our lives in their sights for a long time, observing the status inequality between those in work and those in retirement, and, typically, the social devaluation of those who are retired. But it is wrong to treat people in retirement as a single, undifferentiated group. There may be significantly more financial, social and health-related variation between people in retirement than between people in work.
Let’s focus in, then, on the causes and nature of inequality in retirement. And let’s start near the top; not those of spectacular wealth, but what we can think of as commonplace affluence. What I have in mind is a retiring couple who have largely relied on their incomes to get them through their lives, but now find themselves in retirement, literally and metaphorically, on a golden beach in the sun. I’m thinking here of a couple with a significantly occupational pension (or two) and a residence that they now own outright with no remaining mortgage. There may also be other investments, such as a share portfolio, life assurance policies, or a second property either to generate income or as a second home. And, very significantly, our gilded couple will be the beneficiaries of an inheritance in the hundreds of thousands of pounds, or more. Most often inheritance arrives on the brink of retirement, as the increasing life expectancy has also changed the stage of life when inheritances are received. In current OECD demographics, it is likely that most potential inheritors will be at, or close to, the end of their working life when they inherit these assets from the last surviving parent, and therefore, inheritance will help fund retirement, rather than set them up for life, as we still often think, outdated though this idea generally is.
If at one end of the scale there is commonplace affluence, at the other is what we have already identified as borderline poverty, by which I mean people who despite a lifetime of work, never bought a house, or investments. They lack a decent private pension, and are not expecting an inheritance of any substance. People in this category may well face a retirement of poverty and ill-health, especially if their job was physically demanding. They will be highly reliant on state benefits, or family support. And along the scale are a myriad of other possibilities of varying comfort.
In thinking about inequality it’s very common for commentators to talk about the distinction between ‘the few and the many’, conveniently placing themselves in the category of the many, opposed to the 1% or even the 0.1%. And certainly there are important distinctions to be drawn. But here we’ve identified another fundamental divide, and many commentators, including myself, will be found among the relatively privileged. It’s hard to know where in the income divide the line should be drawn, but it’s more likely to be around the 25%, give or take, rather than 1%. Remember we are not talking about families only of great wealth, but a much more common middle-class pattern in which the main family asset is a family home, bought on a mortgage (perhaps initially with family assistance) paid off in full over time, and then is passed on to children.
How much do people leave, typically to their children, in the UK? According to official figures, although only around 3% of people declared an estate literally worth nothing (or insolvent) in 2015-6, estates where the amount does not reach the current inheritance tax threshold of £325,000 (£650,000 for surviving spouse) makes up very great majority of estates in the UK. Indeed, about a third of all estates in the UK in 2015-16 were below £80,000, with fewer than 2,500 (1%) estates valued at more than £2m (although ‘estate planning’ may distort these figures at the upper end.) About 60% fell into the £100-500k range.
Let us, for the moment, focus on this modal range of estates between £100k and £500k, most of which will be inherited tax free. Within this range, experience will vary tremendously. If, for simplicity, we assume that inheritance is inter-generational, and people live in traditional families with between 1 and 4 children, inheritance will vary from those who can expect £25k and those who can expect £500k. Within this range a type of economic differentiation takes place, although again this varies by location. Inheriting £100k in Central London is very different to the same bequest in a part of the country where it is possible to buy a house for that sum. But still, even in Central London, expecting to inherit £100k at some point later on may make people more relaxed about taking on more debt to fund their children’s post-16 education or reducing working hours, for example, knowing that financial adjustments can be made later. Expecting ultimately to inherit £25k is much less likely to make a large difference to how one lives one’s life now.
My suggestion, then, is that, even when putting inheritance aside, there is currently a divide in UK society between those who know they will retire in relatively financially sound circumstances, having paid off their mortgage and benefiting from a private pension, and those who will have to survive on a state pension, and other state benefits, while still paying rent. Significant differences in inheritance, which we’ve seen even in the modal range are likely to vary between £25k and £500k, are likely to compound this difference, with those already doing better more likely to get more.
Of course, there will be cases where inheritance bridges the gap rather than amplifying it; people having rented all their life inherit their first home (or the money to buy one) as they retire. This type of situation may well increase over the next thirty years as fewer people in this middle range are able to buy their own homes, and so there is a blurred middle ground. But still, there is a type of social and cultural segregation, reinforced by economic factors, and strongly compounded by inheritance, in a country like the UK. Perhaps those in the top 20-30% of income and wealth are likely to be above a line, the bottom 50% below it, and those between in a grey area, with some of the benefits and some of the difficulties. Few of those above the line will regard themselves as rich, and many will have had a hard time managing a family budget at some point in their lives. But, so I claim, the divide is real, reinforced by patterns of inheritance, and exerts itself particularly in the difference between a comfortable and a struggling retirement.
What should society do? Should we shrug our shoulders and say that as long as the welfare state is strong enough so that no pensioner is forced into poverty or destitution, we should just let everything take care of itself? Or are these inequalities so gross and disturbing that we need serious new social policies to address them, if only we can think of the right ones? My recommendation at the moment is simply to notice and to reflect. It’s in the interests of those who will benefit to let the matter retreat into the shadows. Against my own interests I want to drag it in to light and think about what can be done, rather than lazily pointing the finger at the superrich as the only beneficiaries of the economic divide.
Jonathan Wolff is the Alfred Landecker Professor of Values and Public Policy and Governing Body Fellow at Wolfson College, Oxford.
