Dealing with reality

Michael Gregg goes through the latest AXA Wealth Pension Index, which reveals the disparity between what people expect from retirement and what they are likely to get

I don’t believe there are many people out there who ­disagree with the view that the financial services industry has taken a bit of a bashing over the past couple of years.

There are going to be knock-on effects of the events of recent times on product providers, IFAs, and – ultimately – consumers, both now and when they reach retirement and wish to draw a pension.   

To highlight some of the issues facing the UK’s future pensioners, AXA Wealth recently developed a new index measuring affordability and volatility in retirement saving. It discovered a worryingly significant disparity between desired, expected and actual retirement ages.

According to the research, many people are now at risk of either facing a lower standard of living in retirement or having to work ­significantly longer if they wish to retire at the income level they would have retired at in 2005.

Trends

When you start talking numbers, the truth seems even more frightening. The average age that people in the UK would like to retire at is 58, while the average age that people in the UK expect to be able to afford to retire at is 64.

Unfortunately, it now seems that the average age people will actually be able to afford to retire is 71 – something that very few of us will be happy to hear.
Unlike the past, uncertainty in ­retirement is now common. Rules and expectations around ­retirement age have changed ­significantly and people can no longer rely on the state to ensure their financial future.

For many years, the state retirement ages of 60 for women and 65 for men were set in stone. ­Gradually, this is being levelled up to 65 for all by November 2018 and will then increase to 66 for both men and women from December 2018 to April 2020.

This is unlikely to be the end of it, with various papers suggesting that an age of over 70 will be with us soon. Indeed, the recent Green Paper on state pension reform ­suggested a couple of ways of ­increasing the age in the future in line with longevity improvements.

The subject becomes increasingly interesting when you consider that people insure many of their assets – such as their house, their cars and even their lives – but still tend not to insure some of their most valuable financial assets, which are often worth far more than any of the above.

Pension savers need to understand how to consider reducing or eliminating some of the key risks ­associated with retirement ­planning, in particular volatile stock market returns. Similarly, people need more guidance around ­investing for the long term.

The heightened challenges ­facing pension savers may result in a move away from the traditional ­standard annuity type pension to more sophisticated variable ­retirement models – potentially with ­investment guarantees.

Stock market performance

The AXA Wealth Pension Index also highlights that poor stock market performance can negatively affect the size of a retirement ­investment, resulting in a lower pension ­income.

Many pension funds are invested in the equity market and therefore fluctuations can affect the end result. There have been upsides, but also downsides and poor timing can be as bad as a poor investment decision. 

Although retirement ­affordability has improved slightly over the past couple of years due to ­improving market conditions, it is clear that there is still a need for some form of protection in periods of ­extended volatility.

A broader range of investment solutions are becoming available to UK investors, and a prudent long-term retirement plan should consider a combination of both traditional and ‘next generation’ products.

Michael Gregg is managing director at AXA Global Distributors