Personal Pension  

Ageing population presents problems for pensions

    CPD
    Approx.30min

    It’s vital we face up to this challenge, as one of the well-documented facts about age-related cognitive impairment is, while the ability to do even simple sums diminishes with age, many older people don’t realise they are getting the sums wrong.

    Dashboard

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    One of the themes that comes through in the DP is the need to get all the information about all potential sources of retirement income in one place so in-retirement planning can be made easier.

    With this in mind the concept of the Pensions Dashboard (more commonly trumpeted as a way of coping with legacy AE pensions as many of those being auto enrolled today will have many more jobs in their lifetime than the last generation, and therefore will accumulate many more relevantly small AE pension pots), is also championed as a great way for the over 65s to get to grips with what exactly they have got to draw on in retirement.

    There is also some discussion in the paper of the totally disinterested being pushed into default policies that are in the long-term interests of the member. There will be a need for strong independent governance here with kite-marking of simple drawdown products against strict quality criteria, for example.

    There is also clear need for people to properly understand ‘longevity risk’ as they are now bearing that risk themselves rather than passing it to an insurance company by purchasing an annuity.

    Research shows we underestimate when we are going to die – on average – by two years for men and four years for women. But more importantly, few people have a good grasp of the probability distribution of them living to various ages. Yet somehow they have to cater for this spread!

    Worse than this, if you look at the Australian example of what happens once annuity purchase at-retirement is made voluntary, the tendency to run out of money in-retirement is clear. Down under 40 per cent are running out of money before they are 75 years old, a quarter by the age of 70.

    We also know from the US experience many pensioners are taking out 8 per cent or more of their retirement savings pot each year once they are retired. On average, at that rate you run out of money within 17 years. So if you retire at 65 you might hit the financial buffers aged 82 years.

    But many of us have parents well into their 80s already, so it is highly likely we will join the growing ranks of the octogenarians (or older still) ourselves.