July pensions supplement: work is the new retirement
The word “retired” may well have outlived its use
The stereotypical image of people putting their feet up with their pipe and slippers in retirement is as outdated as cassette tapes. Retirement is no longer simply a decade to relax once a professional career reaches its conclusion—most people can now expect to be retired for more than double that time.
Even the word “retired” might have outlived its use due to its association with the second stage of life in which people now, rather than opting for inactivity, pursue interests that may have been out of reach when they were working full-time.
When I think about the way retirement is being redefined, I’m reminded of one of my favourite quotes on the feeling of finally shaking off the shackles of corporate life: “My hands tremble when I think on the wonders I can now perform.”
In many cases, this wonder involves a second career and recent research we carried out with YouGov suggests that the number of people working part-time in retirement is set to increase substantially over the next decade.
A quarter of people approaching retirement in the United Kingdom expect to work part-time to supplement their income when they give up full-time employment—at present, only a tenth of current retirees work part-time.
One assumption is that people are looking to continue working just to get by, but two-thirds of non-retirees who plan to work part-time want to do so to keep busy and say that they feel too young to stop. A large percentage even intends to start a business or switch to a new career.
The way people generate an income in retirement is also changing. People no longer need just an income to sustain themselves as they wind down their lives once their salary stops.
They want to know that they can spend money safely in retirement on whatever they want, so they now need the financial flexibility to allow them to do just that.
To its credit, the government has recognised this and has radically changed the way people can take money out of their private pensions.
The reforms, announced in March 2014 and recently implemented, have been like a shot of adrenaline for the market as pensions suddenly became front page news. I suspect more discussions around pensions have been held in the nation’s pubs and coffee shops over the past 12 months than in the preceding 12 years.
While the state pension is still the bedrock of retirement income for most people, the blend of income sources retirees combine with their state pension is changing.
For example, our research shows that over half of retirees today have a defined benefit or final salary pension but this number will decrease significantly as only 37 per cent of those coming up to retirement are expecting to enjoy the benefits of such a scheme.
As these gold-plated schemes disappear, defined contribution pensions are increasingly filling the void. Although they bring some additional risk for savers, since investment risk sits with the member rather than a corporate sponsor, defined contribution pensions can provide the greater flexibility required, both in terms of the amount saved and the way you take income.
Annuities, for so long the default option for turning your savings into an income, have fallen from grace with just 16 per cent of those not yet retired looking to use an annuity to generate an income from their savings in retirement.
In contrast, around 65 per cent of current retirees are receiving their income through an annuity. As the default, secure income via an annuity was often secured at dismal rates and could not be passed on to families upon death.
Changes to the way pension savings are accessed, however, do not paint the full picture. One of the more significant upcoming trends in evidence is for people to use property wealth as a source of income in later life.
Many people have benefited from large rises in property values over the past 30 years and are increasingly looking at ways to release that value. Buy to let and equity release have received significant coverage recently but the largest change in property matters appears to be in the willingness of people to downsize their home.
Of those coming up to retirement, 16 per cent intend to downsize their main home to contribute to their income. In comparison, only 3 per cent of current retirees have already done so.
While the flexibility given by the new pension rules is generally great news, there are now many more options for people to consider, which means that financial advice has never been more important.
Our research also shows that retirees who used an advisor and who had a target retirement income in mind were receiving 49 per cent more income than those who did neither. Thankfully around half of over-55s have seen an advisor, with a third of those seeing one regularly.
For those who do not wish to seek full professional advice, the government’s PensionWise service is a good introduction, but its guidance simply won’t be enough for many. People need bespoke advice, possibly more than ever before, that is tailored to their individual needs and this can only be provided by a professional financial advisor.
Retirement has been redefined beyond recognition in the last year and the financial services industry has a crucial role to play in helping everyone understand the wider range of options available to them.
There is also an opportunity to provide them with new solutions that match their evolving needs, that aren’t just limited to pensions.
Financial services companies must look to reboot their thinking around traditional product structures and understand that the retirement phase of our customers’ lives has changed forever.
Paul Feeney is CEO of Old Mutual Wealth
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