Listen to this article
Retirement is not what it used to be. When the National Assistance Act was introduced in Britain in 1946, men could expect to live only 15 months beyond the official retirement age of 65. Now, with UK life expectancy at 79 for men and 83 for women, there are no limits. We can work for as long as we like — and many of us want to do so.
Nevertheless, there are extremes in our attitudes towards retirement. At a New Year lunch party among my neighbours, one 55-year-old said he was planning to retire this year, take a lump sum and devote more time to golf. By contrast, a former banker, now well into his 70s, had just started his fifth job since retiring. He said he liked to feel useful. His latest venture is helping out a business start-up — a job that will contribute towards a luxury holiday.
The younger man still has a mortgage and has not yet worked out how much money he needs to cover his costs. He is also unsure how he will fill his time when he leaves his senior role at an industry regulator. He has opted to liberate his final salary pension, taking advantage of record transfer valuations, and has switched the funds to a Sipp (self-invested personal pension). But he still needs to work out a retirement income strategy to establish how hard he — and his money — will need to work to keep up with his desired lifestyle.
Many of us struggle to find the time to plan our retirement finances properly. The Pensions and Lifetime Savings Association (PLSA) estimates that 13.6m workers are at high risk of failing to achieve an adequate retirement income. Only 16 per cent of those questioned knew how much they needed to save. The International Longevity Centre calculates that we should target 18 per cent of salary each year — but those who start saving later will need to save more.
It is not surprising, therefore, that more of us are working longer to build up retirement income. Data from the Department of Work and Pensions published in December 2017 showed that men and women are increasingly staying at work beyond the state pension age (currently 65 for men, and gradually rising to 65 for women, but will increase to 66 for both by 2020).
The average retirement age for men has risen by two years to 65.1 years over the past two decades, rising to 63.6 years for women. Some 10 per cent of over-65s are in employment.
To qualify for the new £8,300-a-year state pension, UK workers must have 35 years of qualifying national insurance payments Anyone retiring early should check their national insurance record at www.gov.uk/checkmystatepension. You may have to make voluntary contributions, particularly if your employer has contracted you out of the state second pension scheme. Only 45 per cent of people retiring between 2016 and 2020 will get the full flat-rate pension, according to figures from broker Hargreaves Lansdown.
And your pension may have to last for a long time. Anyone reaching the age of 60 has a 50 per cent chance of living to 90 or more, according to The 100 Year Life and Working in an Age of Longevity by Professor Andrew Scott and Lynda Gratton.
Most people feel they need about 75 per cent of their income from work at the end of their career to have a relaxing retirement. But this could be more if you are still paying a mortgage or supporting adult children. You must also consider whether your spouse will rely on your pension.
Traditional “final salary” or defined benefit pension schemes often have linked benefits, but considering current transfer values can be as high as 40 times the annual income from the pension, many couples are investigating cashing them in. Almost £50bn has been transferred since the pensions freedoms were introduced in 2015.
A liberated pension pot can be used to fund a new business, but you will need a back-up plan, as a failed business could lead to an even poorer old age.
Moving the funds to a defined contribution pension will not be the right option for everyone, and you will be required to take independent financial advice. The highly advantageous inheritance tax treatment of DC pensions is another attraction, particularly for those in ill health, but many experts have cautioned that pensions rules could change in the future.
For those looking to perform the reverse of this transaction, and use their pension pot to buy a secure income in retirement, the same financial forces are working against you.
It currently takes a pension pot of about £1m to produce an indexed annuity of £32,000 a year for a 65-year-old.
For this reason, the popularity of drawdown schemes — where pension funds remain invested to provide an income — has hugely increased. However, savers need to understand the risks.
A serious market correction could affect the capital value and the income stream from your investments. Again, advice needs to be taken.
But your pension is not the only asset you’ll have available for funding your retirement. Downsizing to a smaller house will free up cash. Buy-to-let property, Isas and other investments can all be useful for bridging gaps in your retirement funds.
If you have a mortgage, you will probably need to negotiate a longer-term fixed rate loan before you retire. Many lenders do not regard pension income as being as secure as wages, even though annuities are guaranteed. Those with drawdown pensions are likely to have even greater difficulty and will probably need the help of a mortgage broker.
Borrowing to buy a car or taking out a new credit card may also be tricky for older people who have let their credit profile age with them because they have not needed to borrow. While you are still earning a regular wage, use one of the many free services available to check for any black marks.
Clearly, there is a lot to consider. You may find that it is wise to invest in the services of a chartered financial planner to help you identify the most tax-efficient route to a comfortable retirement for you and your family.
Lindsay Cook is co-founder of consumer website MoneyFightClub.com and co-author of “Money Fight Club: Saving Money One Punch at a Time”, published by Harriman House. If you have a problem for the Money Mentor to look into, email firstname.lastname@example.org