Solving the age old conundrum

Matt Masters

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Retirement is a familiar part of our social universe. Historically, however, retirement was anything but common. Looking at more recent history, we can see this.  For example, the UK’s Old Age Pension was only introduced on 1 January 1909, to around 500,000 people over the age of 70. By contrast, one in five people, or around 13 million, are now claiming the State pension (and aren’t having to wait until age 70 to do so!)

Somewhat ominously, the number of people in the UK of State Pension Age or older as a percentage of the working age population is projected to increase. Back in 1901, there were 10 pensioners for every 100 people working. This has now increased to 28 pensioners and, owing to the increase in life expectancy and lower birth rates, is expected to continue to increase, to around 37 pensioners by 2040. 

As a result, the Government is expected to spend an ever-increasing amount of the country’s GDP on pensions and related benefits. Whether this is sustainable has yet to be seen.

The differentials

A suitable retirement income can mean different things to different people. Will it provide an acceptable standard of living? Does it have an inbuilt level of inflation protection? Is it guaranteed to pay out until death? Is it flexible enough to change as needs change or to meet spikes in expenditure?

Different people, and different groups of people, will be affected differently. Some, like Jeroen van der Veer, former chief executive of Royal Dutch Shell, are unlikely to have to worry. He is sitting on one of the UK’s biggest pensions, of some £1.3 million each year.

The 15+ million Baby Boomers, now aged between 55 and 74, are likely to reach retirement with relatively high levels of Defined Benefit (“DB”) provision compared to the younger generations and have higher State Pension entitlement. They are also more likely to have other sources of income and housing equity.

The 13+ million Generation Xers, now aged between 40 and 54, will reach retirement with lower levels of DB entitlement than the Baby Boomers and more Defined Contribution (“DC”) savings. They will also receive less income proportionally from State pensions (owing to the effect of working patterns on their State pension entitlements), are more likely to reach retirement in rented accommodation, more likely to need to provide care, and less likely to have other savings to draw on.

Different economic climates have put upward pressure on the cost of living (predominantly accommodation), and downward pressure on inflation adjusted wage growth, meaning that younger groups are earning less, and housing is more expensive. In addition, the 17+ million Millennials, now aged between 20 and 39, are the least likely to have a DB entitlement (but will have greater DC savings than the Generation Xers as a result of automatic enrolment). They are also most likely to work casually or be self-employed (with the greatest impact on their State pension entitlements).

Individual responsibility

While many people view the Government’s key role as providing a safety net to those most in need (including, traditionally, the elderly), there is a clear move towards passing responsibility back to the individual, as witnessed by automatic enrolment. This is, in part, a response to the financial pressures the Government is facing over the coming decades. 

As a general rule, there are certain things individuals can look to do to help make retirement more comfortable:

If eligible, join the company’s pension scheme.

Members benefit from employer contributions as well as the Government’s tax relief to boost pension savings.

Start early. 

While retirement might seem like a lifetime away, it will benefit in the long run to save now and spend later. For younger people, the money saved now will grow through investments. For older people, there is still a benefit from tax-relief on personal contributions.

Saving a little extra can make a big difference.

The cost of living can make it hard to find money to save. Whether it’s a pay rise, a bonus, or money that can be freed up by spending less somewhere else, it’s always worth thinking about paying a little more into a pension.

Work longer, giving your pension time to build.

Government statistics suggest more than a million people are working beyond State Pension Age. Some because they enjoy it. Others out of necessity. Either way, it means more time for money to grow whilst not depleting retirement savings.

Matt Masters

Post by Matt Masters

Matthew is an experienced pension scheme actuary who has advised a range of pension scheme clients and their sponsors on actuarial and investment matters. Having an appreciation of trustees’ and sponsors’ objectives and concerns means that Matthew is well placed to provide practical and pragmatic advice that is acceptable to all parties.

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