Income distribution of retired households

What does the chart show?
The disposable incomes of pensioners aged 65 to 74 after direct taxes are likely to increase by 1.9 per cent a year over the next 10 years — to give an average annual income of £41,500.

However, with the average weekly cost of nursing care for self-funders at £1,035, the majority of retired households requiring these services cannot afford to pay the annual fees of £53,820 out of their income, according to research by Irwin Mitchell and the Centre for Economics and Business Research (CEBR). Their report, “Elderly Care Crisis: A Tipping Point”, found that a worrying wealth gap is opening up, as only the top 10 per cent of retired households can afford to fund nursing home care from their incomes.

Currently, those aged 65 to 74 have the highest incomes after direct taxes. However, the over-85s — the group most likely to be in a nursing care or residential home — are expected to have an average income of £30,800 by 2030, far short of the cost of care.

Effectively, those who need to pay for care must use other sources of wealth to make up the difference. One-third of households aged 65 and over have pensions, property and investment wealth valued at less than £300,000. The wealthiest 25 per cent of households have more than £1m in assets.

Why is retirement income falling short?
Fewer pensioners will have defined benefit or final salary pensions over the next decade, making it harder for them to pay for care. In 2006, some 3m private sector employees were members of defined benefit schemes. By 2018, this had fallen to 1.1m. Meanwhile, the introduction in 2012 of automatic enrolment pension schemes, where employers pay much smaller contributions, increased the number of members in defined contribution schemes to 9.9m.

In 2018, the average employer contribution to defined contribution schemes was 2.3 per cent compared with 16.2 per cent for defined benefit schemes. Employees paid 2.7 per cent to defined contribution schemes.

There were 17.3m active members of occupational pension schemes in 2018. Many are not saving enough. The report estimates that the average worker would have to save £575 more per month to be able to fund “a moderate retirement”.

How do they fill the gap?
Only 12 per cent of over-65s are in paid employment. Many rely on friends and family to help them pay for care. With the state pension age increasing to 68, it is important for employers to support older people in the workplace.

This could be done by retraining workers and making workplaces more accessible. Many of the over-65s who are in paid employment are self-employed. About 18 per cent of adults who have relatives receiving professional care help to pay for it. This amounts to 4 per cent of all UK adults. The average amount paid is £5,900, with some paying more than £50,000. Over-55s are the most likely to pay for care and they need to considering funding their own later life.

Where else can money come from?
Releasing equity from homes can help if older people are able to downsize to smaller homes. Currently, over-65s who own their homes outright account for 9.3m spare bedrooms, according to the English Housing Survey. But many are discouraged from leaving their family homes by the lack of suitable smaller accommodation and the cost of stamp duty. The report calls for government assistance for downsizers, who currently get no help, unlike first-time buyers.

What should workers do to prepare for old age?
The report says that workers should consider care home fees alongside other major financial commitments such as pensions and mortgages as part of their financial planning. The number of people needing long-term care is increasing at a rapid rate and the cost of care is far outstripping inflation. The average stay in a residential care home is now 30 months. For nursing homes, the average stay is 16 months.

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