Making way for living longer

Recent research from Standard Life highlighted huge changes in how retirement is being viewed. John Lawson looks at the impact these changes could have. John Lawson

Retirement is dead. Or at least the idea that retirement is an event which happens at 65 and after which you stop being active is dead. Instead, the baby boomer generation is leading the change for a new retirement with far greater ambitions than previous generations for their post-retirement lives.

The shift in attitude among baby boomers towards their future has taken place alongside the fundamental change in the structure of the UK population. Life expectancy is increasing rapidly and it is predicted that by 2050 men could expect to live for a further 25 years and women 27 years once they reach 65. Based on current trends, and as noted in a recent report by Lord Andrew Turnbull, the percentage of their lives that people spend not working will rise from 17% in 1950 to 37% in 2050.

The ageing of our population has dramatic implications on the workforce. As a rule of thumb, for the economy to remain sustainable, approximately 50% of the population has to be economically active. Worryingly, on current projections, this will only just be the case by 2050 by which time there will have been a 20% increase in the ratio of non-workers (dependents) to workers. The balance will soon after tip the other way, with more non workers than workers. This shift compares to the UK economy in 1900 when there were three workers to every one dependent.

Attitude shift

Recognising this demographic and attitudinal shift, Standard Life commissioned a study titled the 'Death of Retirement'. This report looked into the perceptions and ambitions of this baby boomer generation for retirement in comparison to their parents. The report proved what Standard Life had suspected - that this demographic has entirely different ambitions for each aspect of their life during their 'third age', so called because this stage will account for close to a third of life.

It also analysed the psychological impact of finishing work or reducing professional commitments and the attributes needed to make the most of 'third age'. It highlighted that advisers should consider this aspect as well as traditional financial planning.

One aspiration that offered more of a surprise than any other was the level of ambition around enterprise that generation has. Among the 46-65 year olds who were questioned, one in sixteen stated their intent to embark on a new business venture post 'retirement', seven times as many as their parents at the same stage. This would result in almost a million new businesses, which if you put into context of a total of 4.7 million SMEs in the UK, could be massively significant.

If such an enterprise revolution were to take place, those leading it, today's baby boomers, will be ideally positioned; they will have vast experience and expertise combined with technical as well as softer skills. To put it another way, the perfect range of skills with which to set up a new business.

Along with those wanting to start new businesses, a third said they wanted to continue working but on their own terms which compares to only 15% of their parents. At the same time, baby boomers want to do 'more' with over half wanting to travel more post-retirement. Retirement has changed, and is no longer a single event. For this group, it will be a far more flexible experience that will therefore require a more flexible approach to financial and retirement planning.

While the study demonstrated that this group are optimistic and ambitious for their third age, it also highlighted a significant gap between their aspirations and putting financial plans in place to provide for this future. Worryingly, one fifth (22%) of those 46-65 year olds from more affluent financial groups admitted they had no financial plans in place for their third age. This compared to just 8% of the overall sample and illustrates the scale of the challenge (and opportunity) for advisers.

The report also highlighted that baby boomers recognise they are the sandwich generation who in the future may have to financially support older and younger family members. Two in five (43%) expect to have one or more financial dependents when they retire whether they be adult children still needing support or parents requiring long term health care. This contrasts to only one in four (27%) of the parents of this generation having a similar financial burden at retirement. Yet, many have not yet put the financial plans in place that will enable them to overcome these dilemmas and achieve their goals.

The overriding message from this generation, however, is that they do not want to get to traditional retirement age and stop. Providers and advisers need to respond and ensure they are offering the necessary tools and products to allow people to spend the final third of their life as they wish. If we can make the connection between aspirations for retirement and the products available to them for long term saving, we will help people achieve their goals and also reduce reliance on subsequent generations. It is that simple.

Providing flexibility

Westminster needs to examine the current incentives for working past 65 and whether or not some kind of tax break should be provided for this generation of 'olderpreneurs' to encourage them to innovate and continue to generate wealth past the age when people have traditionally ceased to be economically active. Although it is clear that there is appetite among this demographic to work, the returns in terms of potential economic activity will significantly outweigh any lost tax revenue through incentivising work among this demographic.

This group has complex financial needs that can only be met by pension products that allow flexibility in terms of investment and drawdown. Self invested personal pensions (SIPPs) are one step towards providing for the flexible future that baby boomers aspire to and many consumers are already benefiting, not least from the tax benefits that can be leveraged. Despite having been around for twenty years, SIPPs only began to become more popular following the changes at A-Day, but many are still not aware of the flexibility that they offer.

The US is a long way ahead of the UK in terms of attitudes to saving, having already started to answer the challenge of providing pension flexibility to all and successfully encouraging people to engage earlier with saving into lifelong products. The 401(k) plans in the US have been key to establishing the link between lifelong saving and future plans by allowing far greater flexibility on drawdown.

UK consumers need to be engaged in a different way from that which they have been to date. The idea of lifetime savings is one that needs to be embedded in children from a young age, but equally, this savings pot needs to be accessible (or at least some of it) should the policy holder choose in later life to, say travel more, or set up a business. The ambitions for third age are only likely to increase among future generations if demographic trends of being healthier, wealthier and living longer continue.

Planning for the financial future has never been more important. The industry as a whole needs to reconsider how to best meet the needs of the baby boomers and future generations into retirement. Providers and advisers are well placed to lead this change and support consumers in making the connection between their ambitions for their future life and financial planning. By doing so, there will be an attitudinal shift to pensions and 'third age' planning which in turn will create a huge opportunity for providers and advisers alike.