From Special Report: At Retirement - May 2012
Carry on working
With retirement being a constantly changing subject for most people still employed, advisers must ensure clients stay on top of the latest changes
How much income do you really need in retirement?
This is a difficult, but important question to consider when planning how much to save, and how much you will need to live the life you may have become accustomed to. It is the right question to begin with.
When discussing this with younger audiences, I often use the following scenario as an example. Let us take a 35-year-old who has finished university, paid back some of his debt and has taken time to enjoy himself, but who now wants to think about his pension. He thinks he would like to retire at 65 and could live to 95, so the saving period is exactly as long as the retirement (spending) period.
To put it another way, in this example, every month’s salary not only has to pay for one month today, but also has to pay for a month in 30 years’ time. While I realise that it is not quite that simple in practice, it is very good way of illustrating the importance of saving. The normal response is one of panic and tends to lead to comments of: “It’s hard enough to make a month’s salary last for one month – let alone for another in 30 years’ time.”
What can be done to ensure people are prepared for their retirement?
In a previous life, I used to work for a retirement benefit consultancy and did some retirement counselling, and the question I always used to ask my clients was: “How much do you want to be earning on the day after your employer stops paying you?” This question elicited a whole range of answers from those who had no idea to those who had detailed income requirements all worked out.
In those days, we almost had a “maximum” to work to as most people were in final salary schemes and we could make some assumptions about length of service and salary. To some extent we have moved away from this, but we still have a maximum of sorts with the lifetime allowance. The big difference has been the lack of a guarantee and the need to convert whatever defined contribution pot people may have into a retirement income, with the investment risk moving from the employer to the individual.
How much do you need to earn in retirement?
There are a number of indicators that may suggest how much people need to earn in retirement. In 2010, the Joseph Rowntree Association conducted research and using their definition of poverty, their minimum income standard showed how much various households needed in 2010 to reach a minimum standard of living. The research found that a single person needed to earn at least £14,400 a year to reach this standard, and a couple with two children needed £29,200. These figures provide a good starting point for those trying to calculate how much they may need to earn in retirement, but the figures have moved on.
As an industry perhaps the key message we can take from this is the need to plan and focus on the specific need of individuals for whom work and retirement is a continually changing and challenging subject that is in their own hands
In 2011, the Treasury announced the minimum income requirement for those who wanted to consider flexible drawdown. The Treasury set an income of £20,000 a year as the safety net with the potential ability to spend everything above this amount. Its figures suggest that those looking to retire would need at least £20,000 a year, £5600 more than the minimum standard of living level detailed by the Joseph Rowntree Association the year before. Recent research suggests that pensioners in 2012 will retire on something like £15,500 a year, an amount closer to the 2010 figure and an amount that is falling.
If the amount people can expect to retire on is falling, what does this mean in practice? The spending patterns for the retired have traditionally been suggested to be U-shaped – with an initial extra expenditure on retirement then levelling out and with an increase in later life when additional costs such as long-term care become a factor.
In 2011, the department for work and pensions presented a detailed piece of research entitled Perceptions of Income Requirements in Retirement, which presented a detailed study into what people thought they needed in retirement and how they would, or more likely would not, achieve this. In short, there were no definite conclusions and, as you would expect, views on the income requirement were the result of a whole range of factors including age, social background and perception of the world around you.
The report found that before retirement people could generally be put into three categories: planners; non-planners and opportunists. The report also found that people generally behaved according to their category and this was similar to my experiences when retirement counselling.
A variation of the phrase “comfortable lifestyle” emerged throughout the research, but this meant different things to different people and how it was reflected individually was often due to outside influences, such as other people’s experiences, media images and their own experiences.
The research also considered the rationales for people retiring. The decision to stop earning and to have to rely on assets or entitlements is a decision not to be taken lightly. While continuing to work there might be the opportunity to build up more assets to be spread over a consequently shorter period of retirement. When employment stops it really is a case of making do with accrued assets with perhaps the odd inheritance to assist.
Interestingly, most people interviewed in the research process felt they had been “pushed” into taking retirement rather than having more positive reasons for retirement. Some of the push factors make interesting reading: a default retirement age; an expectation that employees of a certain age would retire; health reasons; redundancy and capability.
In the last couple of years there have been a number of moves from government to encourage people to retire later; the state pension age is increasing and the default retirement age has been abolished, to name but a few. When the current economic climate is considered, the government’s aim is perhaps more difficult.
Retirement is changing and not just in the UK, a recent Eurostat survey showed that one-third of Europeans currently employed say they would like to continue working even after they become entitled to a pension. Perhaps a more important statistic is that almost two-thirds of Europeans believe they should be allowed to continue working beyond official retirement age.
As an industry perhaps the key message we can take from this is the need to plan and focus on the specific need of individuals for whom work and retirement is a continually changing and challenging subject that is in their own hands.
Mike Morrison is head of pensions development of Axa Wealth