By Dale Critchley, Policy Manager, Aviva
Most journalists have highlighted that this is too late to solve the millennial’s housing problems, but it has been touted as an opportunity to help close the pension savings gap and allow millennials to reduce what they save for retirement.
As you might expect, I am not an advocate. I can see that it will be attractive to some individuals to claim they don’t need to save much now because they will inherit money from their parents later, but there are some fundamental issues.
The first is that depending on an inheritance for something as important as retirement income is a gamble, not only on your own longevity and health, but also that of your parents. Anyone who has placed an accumulator bet will appreciate that the odds of two events working in your favour are multiplied, so the chance of everything aligning to provide the amount needed, when it is needed, are low.
The age when people inherit is not so much of an issue if we are looking at inheritance to improve income in retirement. Most people will inherit between age 54 and 66 so their inheritance will arrive before they may need to stop working. The major factor, which is not taken into account in the report, is the rate at which the current property wealth of baby boomers may be consumed by baby boomers themselves.
While the pension wealth of baby boomers is greater than that of their millennial offspring, provision for long term care is woefully inadequate. For those who need residential care it has been reported that the average 30 month stay can cost between £50,050 and £92,266. Care fees are calculated as eating up between 56% and 18% of the value of the family home in the North East and London respectively. Those millennials in areas with lower house prices may find their inheritance disappears while those in the South East might find they inherit a lot less than they thought.
With house prices seemingly rising inexorably it is easy to assume that an inheritance will be a life changing, or at least a retirement saving sum. But the average inheritance of the lowest 20% of earners is expected to be only £35,000 (assuming house prices keep pace with general inflation), while those in the top 20% of earners will inherit an average £125,000 on the same basis. This is a relatively modest sum in terms of a retirement fund, and well short of our 10 times salary rule-of-thumb.
Millennials are less likely than older people* to opt out of a workplace pension and it is likely that their pension will continue to be their main source of dependable income. An inheritance may come at an opportune time to boost retirement coffers but it cannot be depended on, and is probably not enough to provide for most individuals. Despite the headline of an all time high inheritance, millennials are probably best treating it as a possible windfall rather than a solution to a comfortable retirement.
*https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/668971/automatic-enrolment-review-2017-maintaining-the-momentum.PDF (p.37 &p.39)
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