Posts Tagged ‘Retirement’

Matt Masters

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.

Angela Burns

We all face decisions every day – what to have for dinner, whether or not to go to the gym – but how many of these decisions materially affect the quality of our future?  Imagine having to make decisions that do materially affect your future without having sufficient information and understanding?

Studies have shown that around 40% of adults cannot understand basic mathematics.  Yet pension professionals expect to be able to talk about annuities, cash commutation and income drawdown with an understanding audience.

Are we doing enough to support individuals at retirement?

In the defined benefit landscape (yet more jargon) individuals have a number of complex decisions to make at retirement.

  • Do I exchange pension for cash? The rate at which this can be done will determine how valuable (or not) this benefit is (as well as how long you will live) – are individuals mathematically minded enough to understand this?  I expect not.
  • When should I draw retirement benefits and from which arrangement– how do individuals assess value?
  • Would a transfer to a defined contribution arrangement make sense to access new flexibilities in this area? There are lots of points to consider (see my recent article on ‘What Drives People to Transfer?’) and the decision is not a simple one – although the requirement for individuals to take financial advice for transfers above £30,000 provides a helpful structure.
  • Finally, many schemes are now trying to provide more flexibility at retirement (pension increase exchanges, partial transfers etc) but with this comes added complexity, jargon and choice.

Many of these decisions are one-off choices which can’t be re-visited, and decision taken at one point in time may not be the most suitable at another.  How do we help people make the best decisions about their retirement options?

Ultimately individuals will need help to make informed decisions. At the simplest end, this could be via communication provided in an accessible way.  For more straight-forward choices, decision trees or financial guidance may be enough to achieve the right result.

For others the complexity of their pension arrangements or indeed their personal circumstances may require experienced financial advice.  So how do individuals access this advice and avoid falling into the hands of the unscrupulous?  Individuals need to be much more questioning of any offers they receive.  Often a pension is the largest asset an individual may have, individuals therefore have to  be sure who to trust – a professional glossy website does not always mean the appropriate due diligence is being carried out.

At the most basic level individuals can use the www.unbiased.co.uk  website to find financial advisers in their area. Recommendations from friends and colleagues can help as can support from employers and pension scheme trustees.

There is a material risk that bamboozled with options, individuals may just chose the simplest option which may not be the most valuable. There is undoubtedly a place for support through employers and pension schemes providing security and validation. This can give access to quality advisors and a straight through process that makes it easy for individuals to make informed decisions. There is also great potential to better use technology to get key information out there in an accessible way.

Thankfully, the market does seem to be reacting to this need with member engagement packages coming onto the scene.  Depending on providers, individuals can have online access to information when and where they need it and access educational tools such as videos to explain key options.  This can then be linked to access to reputable, experienced financial advisors, overall resulting in a more supported straight through process.

I expect this will be the norm in the years to come and I am hopeful that the result is better informed individuals, and better decisions at retirement.

Hugh Nolan

Schrodinger’s Retirement

So apparently we’re all living longer than ever before and the Government’s solution to keep State pensions affordable is to make everyone retire later.  That’s all well and good if your job is easy and you can keep doing it until you’re 67 or 70 (so MPs and Scheme Actuaries will be fine, thankyou very much) but it’s not so practical in many occupations where the physical demands are much higher.  In fact, recent research reveals that 12% of people within five years of State Pension Age are too ill or disabled to work.  According to the TUC’s report “Postponing the pension: are we all working longer?”, only half of people aged 60 to 64 are economically active.  The half that aren’t earning does include the lucky folk who have been able to choose to take early retirement but it also includes those who have been made redundant or are unable to find a job, as well as those too sick, so it’s a safe bet to say that far more than one in eight people in this age range are unable to work. Read more »

David Bogle

For those outside the world of pensions, triple lock is perhaps a term from the sedate world of canal cruising holidays. However for pensioners of the future it is a term they should acquaint themselves with and the impact it has on their future prosperity.

This fairly new chestnut of the pension triple lock raised its head recently. Baroness Altmann, former Pensions Minister in the Cameron Government, has voiced the opinion that the triple lock would not be affordable after 2020. Baroness Altmann has been vocal on pension policy in the past few weeks, (well since she left Government), with her earlier comments on Tata Steel and pension provision. Yet what does the pension triple lock mean and why should our future pensioners care so much? Read more »

David Brogan

In 1977, Monty Python’s Life of Brian asked ‘What have the Romans ever done for us?’ to which it appeared, well, quite a lot actually. However, with the imminent changes within the pensions industry, the question you may have to consider is rather ‘What has the Government ever done for us?’

For starters, there is the introduction of the new basic State Pension which from 6th April 2016 will deliver a clearer State Pension for future pensioners. The current basic State Pension and State second pension (S2P) will be abolished and replaced by a single-tier, flat-rate State Pension of £155- a-week paid to everyone who has paid 35 years of National Insurance contributions (NICs).

A change of this magnitude will be rightly debated and queried, and as administrators there are questions that we can expect to be asked, namely why the government has introduced such a significant change. In turn, we can also expect many pensioners to now have a greater focus on their personal pension benefits as members look to clarify how the changes may affect their total monthly income. Read more »

Richard Smith

Spence & Partners latest blog for Pension Funds Online

It’s been 7 months since the new pensions freedom flexibilities came into effect, completely re-drawing the landscape of retirement savings. During that period, around £5Bn of cash has been withdrawn from the pensions system, both from cashing in small pots and drawing income out of larger ones. However, with an average “cash-in” value of around £15,000, Lamborghini dealers are still waiting to join the party.

Concerns about profligate retirees blowing their retirement savings have so far not come to pass, with general feedback from the industry that people tend to be quite sensible in the decisions they are taking over their retirement income. This is not particularly surprising – it seems a little unlikely that someone who has saved all their working life would suddenly spend the lot as soon as it become accessible; hard-working savers deserve more credit than that. Read more »

David Bogle

Last time, I wrote about the latest mortality projections from the Continuous Mortality Investigation (“CMI”) and the effect this could have on pension scheme liabilities and that it may provide some relief for trustees and sponsoring employers. I then began to cover how mortality affects members of Defined Contribution (“DC”) schemes. This blog covers these issues in more detail.

In DC schemes, members pay contributions towards their own personal fund at retirement, referred to as the “accumulation” phase. When the member retires, they use that fund to finance their retirement, in pretty much whatever way they choose (i.e. the “decumulation” phase). The growing trend towards this process has prompted a joint paper by three actuarial bodies (the Australian Actuaries Institute, the Institute and Faculty of Actuaries and the American Academy of Actuaries), on the issue of longevity risk (“the Joint Paper”). Read more »

Alan Collins

Last week, the Financial Conduct Authority (FCA) splashed onto the business pages extolling the virtues of choice for consumers in the pension annuity market.  Their review has found that 80% of consumers purchasing annuity from their existing providers could have got a better deal by shopping around in the open market.  I welcome the FCA’s continued efforts in this area and trust that, in time, it will lead to a better deal for consumers.

This drive to encourage consumers to shop around with their defined contribution pot should be mirrored in defined benefit (DB) arrangements.  Read more »

Alan Collins

“The acceleration of changes to the State Pension is not a surprise, as life expectancies continue to increase. Within retirement, life expectancy has almost doubled over the last century. While it may not be a particularly cheery message for the festive season, there is unfortunately no magic wand that can be waived when it comes to pensions. Simply put, the only way to avoid having to work longer to fund your retirement is to save more and save earlier.”

 “It is likely these changes will increase the blurring of the lines between working and retirement with more and more people continuing to work even when they are receiving pension income.”

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