We spend many years accumulating the means to retire in comfort, but seldom consider how much might be needed to fund our retirement. Having a pension is something we all agree is important. But do we know enough about the assumptions behind how the scheme is structured and whether it will be adequate for our retirement needs? Ashley Jones, our Senior Financial Planner, explores what you need to consider:
When thinking about pensions one key consideration is how the demographic of the global population is changing. As people live longer and start work later, a significant shift is taking place which is causing policymakers and pension providers to re-examine accepted models of retirement and investment as the proportion of retirees versus people in work changes.
More living longer
King George V sent the first 100th-birthday message to a British national in 1917. With improvements in healthcare and living standards increasing our longevity, British centenarians now receive a message from the Queen on their 100th and 105th birthdays – and every following year. In 2014 the Department for Work and Pensions took on more people to expand the Centenarian Office in Whitehall to handle the increasing work in keeping up with the demand for these messages.
ONS data shows that in 2017 there were 14,430 centenarians living in Britain and 579,776 people aged 90 or over. The number of centenarians has increased by 85% over the last 15 years – and the impact on pensions and savings is significant.
In effect, the UK is getting older and an older population needs to support itself for longer – yet most people still intend to retire at 65. If you retire at this age, and your life expectancy is 100, you will most likely be retired a year for each year you have worked. This just isn’t feasible: the amount you can save during your working years will not be sufficient to fund a comfortable lifestyle over this longer amount of time.
The growth in numbers of people entering tertiary education means the average age of people starting work has increased significantly. In the post-war years the assumption was that working life would begin at 16. Today most begin work in their early 20s, with even non-graduates entering the workforce at 18 or 19. This means the number of years where income is sufficient to build up a savings plan are being squeezed.
|Life expectancy at birth||75||82|
|Pop growth (annual average)||0.25%||0.5%|
|Fertility (children per woman)||1.88||1.9|
A useful benchmark here is the Old Age Dependency Ratio (OADR). This is the proportion of people aged 65 or older per 1,000 people aged 16 to 64. In 2016 the proportion was 285 per 1,000 and it is expected to shift upwards to over 450 per 1,000 within 30 years.
|OADR||Elderly dependents per 100 workers|
Suggested responses to this growing issue include delaying the retirement age: in 1908 when the Old Age Pension was introduced, the retirement age was 70 – and this came down to 65 in 1925. Women’s retirement age was further reduced to 60 in 1940. These ages remained the norm for both public and private pension assumptions until demographic changes drove a review. Consequently in 2007 the law changed to raise the state pension age to 66 if retiring between April 2024 and April 2026, then to 67 if retiring between April 2034 and April 2036 and to 68 if retiring between April 2044 and April 2046.
More and more people are now opting to stay active for longer, either by working part-time or taking on less-demanding roles following retirement to supplement their income. The fact that we are healthier into our old age makes this a viable – and even beneficial – option, with research showing that an active old age increases quality of life significantly.
It is clear that there is no simple answer to the question of building a sufficient capital base to fund a longer retirement. Therefore fundamental changes are needed about how we view our retirement – and the measures we take to fund it. Please get in touch with your financial planner should you want to discuss further.
Ashley Jones, Senior Financial Planner