Recent research has found that retired households are much better off than their working counterparts. And the main differentiator appears to be their pensions. So, could investing in your pension help you join the top 1% of households in terms of wealth? Read on to find out.
The key figures
According to the Office for National Statistics, average household wealth in the UK is currently £302,500. This is a marginal increase year-on-year but is a 20% increase from 2006-8.
The positive is that total wealth is growing. However, the negative is that while total average wealth grows, so does intergenerational wealth inequality.
Retired households have far more wealth than their working-age counterparts, on average. Retirees have an average wealth of £489,300. They also tend to spend less and have a more stable income.
The age group with the most wealth is 55-65 year-olds, with an average of £553,400. This is 25 times the wealth of those aged 16-24.
How your pension can help
The main difference in wealth appears to come in the form of pensions.
According to the ONS data, pensions account for 42% of total wealth. This is more than any other wealth component.
Pensions have risen in their importance over the past 14 years. This is partly due to the way defined benefit pensions are now valued, and partly because auto-enrolment means more young people are now investing in a pension.
For the wealthiest, pensions hold significant value. The top 1% of households have pension assets of around £2 million, on average.
This is 10 times larger than the average pension pot of those aged 55 to 65. The average pension for this age bracket is just over £200,000.
The expert’s view
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, believes this data shows the “power of pensions as a wealth-building strategy,” as private pensions comprise the largest component of total wealth.
Although, the greater level of wealth is at least in part due to retirees being older and therefore having had longer to save.
However, Helen warns that she can see challenges ahead. “Defined benefit schemes are on the decline, and contributions to defined contribution schemes tend to be much lower.”
This means future generations may not benefit from the same level of wealth in later life as current retirees. For young people, investing more into their pension could make a significant difference to their quality of life when they reach retirement age.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, highlights the importance of all investments, not just pensions.
“Financial wealth, including investments and savings, make up 13% of wealth, but the richest households are far more likely to hold this kind of asset,” she explains.
The top 1% of households have more financial wealth than the entire bottom 80% of the population.
Coles argues, “Of course, a huge part of this is the fact they have more to invest to begin with. However, they have also benefitted from growth in their investments over the years. It demonstrates the power of saving and investing over the long term.”
