This short article analyses some of the key trends in the income of retired households between 1977 and 2010/11. Retired households are those where the income of retired household members accounts for the majority of the total household gross income.
The average disposable income for retired households was £17,700 in 2010/11, over two and a half times higher in real terms than in 1977.
Incomes of retired households grew in almost every year throughout this period. In contrast, the average income of non-retired households has tended to increase during periods of economic growth but stagnate during recessions.
More than half of the rise in retired households’ income can be attributed to growth in income from private pension schemes. Income from the State Pension and other cash benefits has also grown in real terms, but income from investments has fallen since 1991 to a level just above that in 1977.
Retired households pay 29% of their gross income in tax, the same percentage as in 1977. However, the composition of these taxes has changed, with retired households now paying a smaller proportion of their income in direct taxes, but more in indirect taxes such as VAT.
Income inequality between retired households increased rapidly between 1977 and 1991, but fell gradually during the 1990s and 2000s.
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The average disposable income for retired households was £17,700 in 2010/11. After accounting for the effects of inflation, this is over two and a half times higher than the average income received by retired households in 1977 of £6600.
Disposable income is the amount of money that households have available for spending and saving after direct taxes (such as income tax and council tax) have been accounted for. It includes earnings from employment, private pensions and investments as well as cash benefits provided by the state.
There has also been a real terms increase in the average disposable income of non-retired households, which rose from £16,500 in 1977 to £35,000 in 2010/11. Despite the absolute cash increase in income being greater for non-retired than retired households, the actual rate of growth for non-retired households has been lower, with income in 2010/11 just over twice its 1977 level.
This means that, although retired households’ income remains much lower than that of non-retired households, the relative position of retired households has improved over the last three decades. In 1977, over half of all retired households were in the overall poorest fifth of households. However, by 2010/11, retired households were more evenly spread across the income distribution.
Growth in the income of retired households has tended to fluctuate less than the income of non-retired households, which has typically risen more rapidly during periods of economic growth and stagnated for longer during recessions. During the late 1970s and the 1980s, the average income growth of the two groups was similar.
However, during the early 1990s and late 2000s the average disposable income of non-retired households did not rise in real terms. In contrast, incomes for retired households increased over these periods. This can be partly explained by the average household income from employment decreasing in real terms in both the early 1990s and late 2000s recessions while average income from private pensions and the State Pension continued to rise.
The differences in income growth for retired and non-retired households also relate to changing household sizes. The average size of non-retired households decreased during this period, while the size of retired households has not changed. Accounting for relative changes in the size and composition of households reduces the size of the difference in real-terms income growth between retired and non-retired households.
In addition to the income of retired households increasing, there has also be a considerable change in the composition of this income. These changes can be examined by looking at the gross income of retired households.
Gross income is the total income households receive from all earnings, pensions, investments and cash benefits, before taxes are taken off. After taking inflation into account, the average gross income of retired households increased from £7700 in 1977 to £20,100 in 2010/11.
More than half of this rise in retired households’ gross incomes can be explained by growth in income from private pensions (including annuities), which averaged 5.5% a year over this period. The proportion of retired households’ income obtained from private pensions rose from 18% in 1977 to 40% in 2010/11, resulting in the average value of income from private pensions being similar to that of the State Pension in recent years. This rise can be attributed both to an increase in the value of the average private pension income and an increase in the proportion of retired households receiving income from private pensions.
Average income from the State Pension also increased in real terms over this period, though at a slower rate of 1.9% per year, with the average retired household in 2010/11 receiving 1.9 times more in income from the State Pension than in 1977.
Growth in other cash benefits was more volatile than that of the State Pension but despite this, the average growth rate over the period studied was similar to that of total gross income at 2.7% per year. This resulted in cash benefits other than the State Pension accounting for a similar proportion of retired households’ incomes in 2010/11 as they did in 1977. Some of the main drivers of the growth in this category included disability benefits, which experienced particularly strong growth between 1977 and 1994/95, and Pension Credit, which was introduced in 2003.
Between 1977 and 1991, average investment income grew at the same rate as private pensions, averaging 6.8% per year over this period. However, the investment income of retired households fell at an average rate of 1.8% per year between 1991 and 2007/08 and at an average rate of 16% between 2007/08 and 2010/11. As a result, the average annual investment income of retired households stood at £1207 in 2010/11, only 11% higher in real terms than in 1977.
As a result of these changes, cash benefits from the state, including the State Pension, made up about half of retired households’ gross income in 2010/11, down from approximately 65% in 1977. Original income, which includes sources such as private pensions, investment income and earnings, has experienced a corresponding increase from around 35% to about half of gross income.
The overall tax burden of retired households was unchanged between 1977 and 2010/11 at 29% of gross income. However, retired households’ tax burden was not constant throughout this period, experiencing a rise in the 1980s to 34% in 1987 and a corresponding fall between 1988 and 1994/95.
The composition of this tax burden has shifted between 1977 and 2010/11, with retired households now paying a smaller proportion of their income in direct taxes (such as income tax and council tax) than they did in 1977, but more in indirect taxes (such as VAT). Retired households paid 12% of their gross income in direct taxes in 2010/11, down from 15% in 1977, while the indirect tax burden had risen to 17% in 2010/11 from 14% in 1977.
Looking at the distribution of income of retired households, between 1977 and 1991 the disposable income of the richest fifth of retired households grew at an average rate of 4.9% per year while the income of the poorest fifth grew at an average rate of 1.7% per year. This contributed to an increase in income inequality for retired households over this period. In 1991, the average disposable income of richest fifth of retired households was 4.8 times that of the poorest fifth, compared with 3.2 times in 1977.
However, between 1991 and 2010/11, there was a slight decline in the inequality, with the disposable income of the poorest three fifths of retired households growing at a faster rate than income of the richest fifth (average growth rates of 3% and 1.8% respectively). By 2010/11, the average disposable income of the richest fifth of retired households had fallen to just 3.8 times that of the poorest fifth.
Most of the growth in income experienced by the richest fifth over this period has come from the increase in private pension income which made up 57% of the income of the richest fifth in 2010/11 but only 15% of the income of the poorest fifth. However, despite being heavily skewed towards richer retired households, the distribution of private pension income itself has actually become more equal over time with 55% of the total private pension income going to the richest fifth in 2010/11, down from 72% in 1977.
In contrast, most of the income growth experienced by the poorest fifth has come from rises in cash benefits (including the State Pension), although the proportion of the poorest fifth’s income made up by cash benefits has fallen from 91% in 1977 to 80% in 2010/11.
The result of these changes is that the distribution of disposable income between retired households was slightly more unequal in 2010/11 than in 1977. In real terms, the average disposable income of the richest fifth of households was 2.7 times higher in 2010/11 than it was in 1977, while the income of the poorest fifth of households was 2.3 times higher.
However, the difference in the average income growth of richer and poorer retired households over this period was less pronounced than the equivalent difference for non-retired households. The average income of the richest fifth of non-retired households was 2.7 times higher in 2010/11 than in 1977, while the average income of the poorest fifth was only 1.5 times higher.
This publication is being released alongside more in-depth analysis of the incomes of retired households and pensioners in the biennial chapters 11 - 13 of the publication Pension Trends.
The figures in this article are based on the Effects of Taxes and Benefits on Household Income series produced by the Office for National Statistics, which itself is derived from the Living Costs and Food Survey (LCF). This series has been chosen for this article due to its long time series and the availability of expenditure data which allows for the calculation of indirect taxes. The period covered is 1977 to 2010/11 because this is the period over which data from the Effects of Taxes and Benefits on Household Income series is available.
All income, tax and benefit measures given in this article have been deflated to 2010/11 prices using an implied deflator for the household sector in order to give a better comparison of households’ standards of living. The figures given are before housing costs and all averages refer to means as opposed to medians.
From 1996/97 onwards, the LCF data are weighted to correct for different levels of non-response between different compositions of household. The data for the years before 1996/97 are unweighted.
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A retired person is defined as anyone who describes themselves (in the Living Costs & Food survey) as ‘retired’ or anyone over minimum National Insurance pension age describing themselves as ‘unoccupied’ or ‘sick or injured but not intending to seek work’. A retired household is defined as one where the combined income of retired members amounts to at least half the total gross income of the household. By no means are all retired people in retired households. For example, households comprising one retired and one non-retired adult are often classified as non-retired. Around one in five households comprising three or more adults contains retired people.
Gross income is the total income households receive from earnings from employment, private pensions and investments as well as the State Pension and other cash benefits provided by the state.
Disposable income is the amount of money that households have available for spending and saving. It is equal to gross income minus direct taxes (such as income tax and council tax).
Equivalisation is a process that makes adjustments to disposable incomes, so that the standard of living of households with different compositions can be compared. Households are ranked by equivalised disposable income from richest to poorest and in order to place them into fifths (also known as or quintile groups).
Thus, in this article, the richest households are those with the highest equivalised disposable income, and the poorest households are those with the lowest equivalised disposable income. This analysis uses the modified-OECD scale. For more information see: Disposable income, and Anyaegbu (2010) which compares results using the modified-OECD and McClements scales (165.7 Kb Pdf) .
The basic unit of analysis used is the household, and not the family, individual or benefit unit. A household is defined in terms of the harmonised definition as used in the Census and nearly all other government household surveys since 1981. This is one person, or a group of people, who have the accommodation as their only or main residence and (for a group) share the living accommodation, that is a living or sitting room, or share meals together or have common housekeeping.
Up until 1999-2000, the definition was based on the pre-1981 Census definition and required members to share eating and budgeting arrangements as well as shared living accommodation. The effect of the change was fairly small, but not negligible. Spending on many items, particularly on food, housing, fuel and light, is largely joint spending by the members of the household. Without further information or assumptions it is difficult to apportion indirect taxes between individuals or other sub-divisions of households.
The sample households have been classified according to their compositions at the time of the interview. This classification is sensible for the vast majority of households, but it can be misleading for the very small number of cases where a spouse is absent from the household at the time of interview.
The absent spouse may well be working away from home, or living separately - but contributing financially to the household's upkeep. These contributions would be picked up as part of the household's original income. Also, it is likely that some households will have changed their composition during the year.
Related publications produced by ONS include:
Pension Trends, Chapters 11-13
An alternative source of income data in this area is the Pensioners’ Income series, produced by the Department of Work and Pensions and based on the Family Resources survey. This series is not directly comparable with the Effects of Taxes and Benefits on Household Income series as “pensioner units” have a different definition to “retired households” which is used in this article. The Pensioner Income series defines “pensioner units” as benefit units with members at State Pension age and above.