From work to retirement
Longer life expectancy and changes to the way we work demand a flexible and practical approach to retirement financial planning.
Advances in medical treatment and healthier lifestyles mean we’re living longer – in 2013, the Office for National Statistics (ONS) reported that the average life expectancy for men and women in England and Wales had risen to 79 and 83 respectively and this is a trend that is expected to continue.
This has major implications for retirement financial planning. A man reaching state pension age (65) in 2013 could expect to enjoy an average of 18 years in retirement, with a woman of similar age likely to live a further 21 years.
Did you know…
When the UK contributory state pension was introduced in 1948, the average man lived less than 12 months beyond the retirement age of 65.
But longer life expectancy is not the only reason why we have to change to way we think about funding our retirement. The idea of suddenly stopping work is increasingly unappealing to many healthy people in their mid-60s who can value the social interaction and engagement (as well as the income) their job provides.
More than 1.2 million people in the UK already work beyond state pension age and that figure is expected to increase significantly over coming years.
According to Dr Ros Altmann CBE, the Government's Older Workers Business Champion, the number of people working past the age of 65 could quadruple to almost five million over the next decade, while around half of over-50s have changed their retirement plans in recent years.
Dr Altmann refers to research suggesting that more than one in five retirees say they wish they had worked longer and that 38% miss the social interaction of work – compared to 27% who say they miss the income.
The increasing ranks of the self employed are helping to drive the trend in working into the traditional retirement years. Self-employment among those aged 65 and over has almost doubled in the space of just five years, from 241,000 in 2009 to 428,000 in 2014. In 2014, 4.6 million people or 15% of the total working population in the UK were self-employed in their main job according to the ONS - the highest percentage since data was first collected in the 1970s.
Self-employed workers tend to be older, with 43% of those aged 50 and over working for themselves, compared with 27% of the under 50s. The average age of a self-employed worker in 2014 was 47, compared with 40 for the average employee.
Embracing blurred lines
Fortunately, people approaching retirement seem to be taking the increasingly blurred line between working life and non-working life in their stride. More than 40% of respondents to a survey conducted by YouGov in November 2014 said they intended to continue working after retirement, with more than one in five planning to work for themselves.
Will you have the option of a ‘phased’ retirement – and if so, are you aware of the likely implications in terms of professional skills, access to business funding and/or tax planning?
Changes to work practices have significant implications for pension savings, explains Izzy Hatfield, a researcher at the Institute for Public Policy Research (IPPR) and author of the report ‘Self-employment in Europe’.
“The UK’s self-employment-led recovery looks like it is the start of the ‘new normal’ for the economy, with more people working as self-employed sole traders. Considering that employee earnings growth has been poor anyway, the fact that self-employed earnings have fallen relative to employee earnings is significant [and] could have big implications for how these workers save for their pensions.”
“There is a growing realisation that retirement doesn’t necessarily have to be an all or nothing situation,” says James McCoy, YouGov research director. “The concept of gradually easing into retirement before completely exiting the workforce is attractive to many. Not only does part-time retirement provide seniors with free time for leisure activities, it also supplements their income.”
What does this mean for me?
Those planning to work full or part time beyond the traditional age of retirement have a number of issues to consider. For example, if you carry on working past state pension age, you may decide to put off claiming the state pension until later. To compensate for postponing your pension you can take a lump sum or draw your pension at a higher rate when you eventually claim it.
The increase is the equivalent of 10.4% extra pension for each year you defer (or 5.8% per year if you reach state pension age on or after 6 April 2016 – visit https://www.gov.uk/deferring-state-pension/what-you-may-get for more details). It may also be possible to defer an occupational pension, although this is likely to only be of benefit to you if your scheme has provision to adequately compensate you for ‘lost’ years.
If you have spent part of your working life in a defined contribution (money purchase) pension scheme, you will also have to decide how you want to put you accumulated pension pot to work to help fund your retirement. Following the recent changes to pensions regulations you now have many more options and are free, for example, to choose an investment solution (if you are prepared to accept some risk) rather than purchase an annuity.
To help you to make these important decisions it can be useful to seek advice from an independent financial adviser. If you do not currently have a financial adviser, one option is to search for a local adviser at www.unbiased.com. You may also find it useful to visit www.vouchedfor.co.uk, where members of the public rate and review advisers they have used.
Please remember, the value of investments and the income from them can go down as well as up and you may not get back the amount invested.
For more information on retirement solutions from Schroders, visit www.schroders.co.uk/retirement.