Time to make a difference

Martin Palmer looks at changing retirement patterns and asks how it will affect people’s retirement planning.

From what is currently being said about pensions, it is hard to avoid the conclusion that there is one overwhelming solution being promoted to ease the pensions crisis: delay retirement for as long as possible.
New economic pressures on the over 50s are already forcing them to reassess where work ends and retirement begins but the government also has plans to re-evaluate the work/retirement balance. It has accelerated a review of the default retirement age at the same time as publishing proposals for funding long term care of the elderly. The care funding models could include additional National Insurance payments or a levy on assets. Add in the plans for the introduction of auto-enrolment of low to medium earners into personal pension accounts in 2012, and we have the gradual but insistent shift of welfare responsibility from state to the individual. The persistent closure of employer-backed final salary pension schemes has added to what is now called the pensions crisis but it would have happened anyway; too few people are saving for themselves and too many are living too long for the state to fund retirement - and care - out of diminishing tax revenues. In 1950 there were 7 people of working age for every one of pension age, currently it is around 4 and by 2050 it will be fewer than two of working age for every one aged over 65. The UK's rapidly ageing population is also forcing the issue of funding for nursing care where a £6billion black hole is predicted within 20 years.

Is working longer inevitable?
No wonder then that the government sees working longer as inevitable. It has already ensured that the age at which UK workers will be able to draw a state pension will gradually rise to 68 by 2046 - higher than the age adopted by many OECD countries - but we are already being told that will not be old enough. Lord Turner, the former head of the Pensions Commission and now Chair of the Financial Services Authority, believes UK employees should continue working until the age of 70.
The government may well agree with him. In deciding to bring forward a review of the ‘default' retirement age which allows employers to dismiss workers at age 65, it is essentially signalling its approval that this age should be higher or should not exist at all. Age Concern has been fighting the default age in the courts for the past three years arguing that the over 65s should be able to work if they want to. For many this choice has already disappeared.
According to the latest figures from the Department for Work and Pensions an estimated 1.4 million pensioners are now working after retirement age and the numbers are rising. Pensioner couples are more likely to have earned income and earnings now account for 10% of gross income. Gross pensioner income - from all sources - was £366 per week for 2007-08.
Research for Friends Provident has highlighted the new pressures on older workers to keep the earnings tap switched on. People retiring today have additional financial responsibilities that previous generations may not have had; at least a fifth) of retirees are still paying their mortgage. Consumer research has revealed that 57% of retirees also have parents who are retired and a third of them are currently supporting their parents financially or expect to in the future. This trend is likely to continue as the proportion of people aged 65 and over is projected to increase to 22% by 2031 (currently 16%). Longer life expectancy also means that the inheritance of property and assets which some had expected to fund their retirement could be just that: an expectation and not a reality.
Longevity aside, today's over 50s are also finding that they have children who either don't leave home or who leave and then return. Student debt and property prices mean that older workers are still funding offspring and if house prices resume their pre-recession trajectory then we may see Japanese-style cross-generational mortgages emerging. The current trend for delaying parenthood will ensure that for some families, school and university fees are still pulling on the household budget well into the fifth and sixth decades.
But financial pressure is only one of the trends influencing the decision making of the over 50s. Many of them want to live as actively as possible and continue to start new ventures, such as new careers. More than a third (35%) of 51-55-year-olds surveyed said they expected to alter their careers at least once before retiring, and instead of having naps they're more inclined to take a gap year or two and head off to see the world.

The death of retirement?
In sum we are probably seeing the death or decline of retirement and for many this will be a mixed blessing. Depending on the type and availability of work, many people may be happy to continue with full time or part-time jobs to keep active and avoid incidences of depression in retirement, an issue which was raised again recently with research by Foundation66.
The trend away from retirement brings with it a number of challenges for government, employers and the pensions industry. The government will be hoping that state sponsored personal accounts will plug the savings gap for millions of workers who have no workplace pensions currently, but the impact of the policy on retirement incomes will be a long way off. More needs to be done now to support employers who continue to offer pensions as an employee benefit and to encourage employees who are looking for incentives to save. Flexibility not complexity should be a key characteristic of pensions and retirement.

A pragmatic approach, particularly in the current economic climate, would be to allow workers access to the 25% tax free lump sum of their pension at any age if the pot size is above a pre-set floor amount and below a pre-set ceiling amount. One of the disincentives for retirement saving is the long term lack of access to pension pots which must be especially infuriating for families who are currently in debt and in danger of home repossession. Australia lets people use pension savings in cases of severe hardship and workers in US have long taken advantage of loans from their private pensions. It makes sense to free up some of the savings and put the money back into the economy.

Target dated funds that take account of varying retirement patterns are also worth considering as part of the defined contribution offering. A new OECD report makes the case for encouraging lifecycle investing which moves people from riskier asset classes as they near retirement. The author, Edward Whitehouse, suggests too that if most pension scheme members cannot be encouraged to actively choose their investment funds then lifecycle should be the default option. Despite recent loss in values, the researchers say that equities should remain part of retirement savings for everyone except the most risk averse. The OECD simulated real investment returns over the 45 years of retirement saving and the results showed that the median return was 7.3% above inflation for a balanced portfolio (half each in equities and bonds), 8.9% for a portfolio of equities and 5.2% for bonds.

For those planning serial career and job changes and a much longer working life, it will be vital to have in their sights not just the right salaries but the right financial packages for the future. More involvement in financial planning should encourage a better understanding of the relationship between risk and reward. The basic ‘to do' list for any worker who wants to take some control of their future choices with regard to work or leisure should include:

• Seeking professional advice

• Paying off debt as quickly as possible and making an early start on saving - contributions have to be significantly higher to produce adequate pensions if the early years of employment are ‘lost' because workers failed to join a scheme
• Ensuring that contribution levels and investment asset classes are reviewed and adjusted to meet expectations and circumstances
• Getting as much information as possible on pension benefits that have built up over the years- there may also be care allowance entitlements from the state
• Communication with children and parents - someone about to retire may not choose to buy an annuity with survivor's benefits but if the surviving spouse will have to rely on younger generations it will be of interest for all concerned
• Being aware of hidden costs such as inflation, inheritance tax and care home fees. It is crucial to allow for inflation which has historically been much higher for pensioners than for the rest of the population as this will help to structure annuity payments

The important central message is ‘to save' even if a pension is not the chosen vehicle for long term investment. Younger people, in particular, are showing resistance to locking away income when it can be used for equity trading or tax efficient - and accessible - ISAs. The increased flexibility we can anticipate from retirement strategies will bring ISAs and self invested personal pensions (SIPPs) into the workplace and into employee benefit packages. Some would say it can't happen soon enough to get all ages planning for retirement.