A generation of retirees are unsure about their financial position and need support to understand it, according to a new study by The Wisdom Council, published yesterday (April 4).
The Great Retirement Study of 2,000 55 to 75-year-olds discovered a worrying lack of preparation for retirement.
Pensions are the bedrock of confidence in those yet to retire, but there is little evidence that such a sentiment is built on solid foundations.
Almost one-third (30 per cent) feel either not at all confident or not very confident that they will live their retirement with a lifestyle they consider to be comfortable. This compares with just 18 per cent who feel very or extremely confident.
Heavily reliant on state pension
One in three expect the state pension to contribute most to their retirement and half will be reliant, to some extent, on cash.
Assessing how long your pension pot could last over the course of a long retirement is crucial from the outset of giving up work Jon Greer, QuilterThe study shows a heavy reliance on cash and state pension, yet also demonstrates unrealistic expectations for everyday income and expenditure in those yet to retire.
The average expectation of expenditure five years into retirement was 92 per cent of pre-retirement levels. This contrasts with the average expectation for income over the same period, being 78 per cent of that before retirement. This is a level of income that few – not even those in the best defined benefit pensions – can expect to achieve.
They want advice, but won’t pay for it
Once these individuals reach the ages of 60 to 64, one in four of them take financial advice. This falls back down to just 17 per cent in the 70 to 75-year-old age group.
This suggests that advice is taken for specific moments, such as drawing pensions, rather than for ongoing retirement or financial planning.
Half of those surveyed said they would be prepared to pay for a one-off professional review of their finances to help their retirement planning.
The average cost people were prepared to pay was just £213, far below the £3,000 average cost of an adviser offering at-retirement advice on a £250,000 pension pot.
Independent financial advisers were the most trusted source of financial advice, with more than a quarter (26 per cent) choosing IFAs, over different financial services institutions, their workplace, or online sources of information.
The Wisdom Council director Alison Malton said: “We’ve found that retirement is very much seen as a process, and not a one-off event.”
Malton called on the industry looking to provide solutions and provision to the next generation of retirees to work out how to be a part of the conversation during the transition from working to retired life, while considering how a customer’s health plays into their decision-making.
“Help people understand what pensions they have, and what that means in terms of income on a day-to-day or month-by-month basis. Those who took advice felt more empowered and confident in their retirement plans,” she said.
“We need to extend this sense of support and preparedness to a wider cohort who want and need professional support but are sceptical of the value of advice”
More and more healthier, long-living retirees
The Office for National Statistics has said that the latest census data indicates that while those of retirement age are leaving work healthier, increasing life expectancy, relationship status and care needs mean they face more complex planning needs. This has thrown the suitability of the current state pension rules into sharp relief.
The number of people aged 65 years and over has increased to more than 11mn in 2021 from 9.2mn in 2011, while the the proportion of that cohort increased to 18.6 per cent from 16.4 per cent of the population .
The growth in life expectancy growth is slowing down, but the UK’s ageing population has become something of a demographic ticking time bomb, as these numbers put greater pressure on the public finances as fewer tax revenues are received.
Retirement saving needs to last a lifetime
Quilter head of retirement policy Jon Greer said that while the state pension age question may have been kicked into the long grass for now, it cannot be ignored indefinitely, as more, longer living individuals collect their benefits.
“However, it stresses the need to ensure any pension provisions can last in your retirement as for some in good health they could expect to live for 30 years or more,” he said.
“The last things retirees need is to have their pension pot run dry as they age, and especially if they are feeling in good health and able to continue doing the things they love.
“Assessing how long your pension pot could last over the course of a long retirement is crucial from the outset of giving up work, giving you time to adapt your retirement plans and ensure you manage your pot as efficiently as you can.”
State pension tax liability trap
The reinstatement of the triple lock on the state pension will take the full single tier state pension up to £10,600.20 (the basic state pension will rise to £8122.40).
With so many shown by The Wisdom Council to be reliant on the state pension, savers are advised to be mindful of any withdrawals they make from private savings to avoid an unwitting tax liability.
From April 6, the single tier state pension will pay £203.85 per week or £10,600.20 a year. However, the personal tax allowance has been frozen since 2021/2022, meaning that the state pension payment has increased from 74 per cent of the allowance to 84 per cent today. Pensioners will only need to earn £1,969.80 of income before they start paying income tax.
Taking evasive action
The single tier state pension was equivalent to 70 per cent of the personal allowance in 2019-20, but the increases and allowance freeze means there is considerably less headroom than before.
Recent history of state pension and personal allowance rates
| Tax year | State pension* | Basic state pension (single)** | Personal allowance*** | SP as % of PA | BSP as % of PA |
| 2016-17 | £8,093.80 | £6,203.60 | £11,000.00 | 74 | 56 |
| 2017-18 | £8,296.60 | £6,359.60 | £11,500.00 | 75 | 58 |
| 2018-19 | £8,546.20 | £6,549.40 | £11,850.00 | 72 | 55 |
| 2019-20 | £8,767.20 | £6,718.40 | £12,500.00 | 70 | 54 |
| 2020-21 | £9,110.40 | £6,981.00 | £12,500.00 | 73 | 56 |
| 2021-22 | £9,339.20 | £7,155.20 | £12,570.00 | 74 | 57 |
| 2022-23 | £9,627.80 | £7,376.20 | £12,570.00 | 77 | 59 |
| 2023-24 | £10,600.20 | £8,122.40 | £12,570.00 | 84 | 65 |
Source: *Full state pension; **Basic state pension rates; ***Personal allowance figures
Standard Life managing director for customer Dean Butler said there are a number of steps people with modest savings whose annual income is likely to be around the personal allowance limit can take.
“While 25 per cent of pension savings can be withdrawn tax-free, the remainder can be taxed. For those incomes hovering around the personal allowance, it's worth ensuring they are not taking bigger lump sums on which they might pay tax if that can be avoided.
“If they do have any Isa savings, these are not subject to income tax so could be useful source of additional income.
“An income at or just above the level of the personal allowance is below the Pensions and Lifetime Savings Association’s estimate for a minimum standard of living in retirement and people in this situation might be struggling financially, even before any tax liability.”
Those worried they may struggle to get by each month would be well advised to check their state benefits by visiting the benefits calculators page on the government website gov.uk.”
Pádraig Floyd
