Royal London has warned those who could be planning to work part-time while accessing their pension could harm their standard of living later in life.
A flexible retirement, which the company defines as reduced working hours while topping up earnings with pension income, could mean retirees are forced to work late into their seventies to achieve a decent standard of living.
Royal London’s The Mirage of Flexible Retirement looked at what would happen if an individual who has only saved into a pension at the legal minimum level decides to draw a state pension as soon as they can and immediately cuts down to part-time work.
Under auto-enrolment the legal minimum an employee must contribute, unless they opt out, is currently 1 per cent of earnings. This will increase to 3 per cent from next April, and 5 per cent from April 2019.
At current auto-enrolment levels, according to Royal London a worker who wants two-thirds of their pre-retirement income and who retires gradually will have to work until they are 79 before they can afford to retire.
This is compared to retirement at age 74 for a worker who defers taking a state pension and maintains full-time hours until they stop working.
Someone who has a goal of half their income in retirement would have to work on until they were 69, compared with retirement at 68 for a worker who defers their state pension and continues in full-time work.
Sir Steve Webb, director of policy at Royal London, said a flexible retirement is likely to be a “mirage for millions of people based on current levels of saving”.
The former pensions minister said: “Those who opt for a gradual retirement, drawing a state pension as soon as they can and cutting their working hours could easily find themselves unable to afford to retire fully until they are in their late seventies or beyond unless they have built up a significant private pension pot.”
The report suggested that, as a rule of thumb, even for workers who do not start saving into a pension until they are in their thirties, each extra 1 per on the pension contribution rate reduces the number of years they have to work by at least one year.
“For those who want to have choices in later life about when and how they retire, doing more now to build up a decent pension pot is becoming essential. These findings need to be considered carefully by the government as it reviews the rules around automatic enrolment in 2017,” Sir Steve said.
But Francis Klonowski, principle at Klonowski & Co, said the report failed to take into account other savings, such as Isas and bank accounts, and ignores the fact many younger people do not save because they are too bogged down with student loans, mortgages, children, rising council tax and other financial commitments.
“Unfortunately they don’t have the spare income to line the coffers of Royal London or any other pension company – no matter what their research says,” Mr Klonowski said.
“When I meet people who are looking to retire in the near future, we take a comprehensive look at their financial situation – in particular how much income they need to fund their desired lifestyle. They don’t ask about flexible retirement options, they just want to know ‘Can I afford to…?’.”
“For most people now their retirement income is going to come in at different stages [such as work pensions and state pensions] so flexibility is already a key word.”
julia.faurschou@ft.com
