I want to retire... can I?

January 23rd 2023

Up until relatively recently, retirement ages were viewed as a fixed date, often 60 or 65, with people working towards a specific age (and even day) their entire working life.

This is largely because more companies offered “defined benefit” pensions, which guaranteed an income at a set retirement age. Due to this, people in my parents’ generation and above could set their eyes on a retirement age prize, with a relatively good idea that what they would receive would be around two thirds of their pre-retirement income at that point. In addition, this usually had a spouse’s benefit included, which would continue paying an income (albeit often a lower amount) even upon their death.

This type of pension is now extremely rare, and the decline in the provision of these pensions is due to a complex combination of economic, social, regulatory and policy changes over the past 35 years, which has transformed the pensions landscape entirely. Factors such as a lower interest rate environment, as well as people living longer, have impacted upon the management of these schemes, and the increasing uncertainty of funding.

In 1981, the average male life expectancy at age 65 was estimated to be 14 years; this has since increased to almost 22 years. This means those schemes have to pay out longer, which costs more money.

However, another key reason is due to the fact the way we work has also changed.

Take my Grandad Donald, a classic example of a man of his generation; he worked for over 40 years at one company, starting after completing his National Service at age 19, and eventually retiring at age 60 with his defined benefit pension earnt over his entire working life. After his death, it continued to pay my Grandma an income, offering a reasonable standard of living as well. Seems a fair pay-out for his lifetime of commitment.

These days however, the work force is a lot more mobile, with many more career and training
options and opportunities available. As such, the average time spent at one company now is 5 years, although this does vary with age.

This has made providing defined benefit pensions harder as even if an employee only works for them for 5 years, the company still has to ensure there are the promised benefits at their retirement age, and these likely need to increase (to protect against the impact of inflation) in the meantime.

So basically, the way pensions are provided by companies has changed and most defined benefit schemes are closed (at least to new members) and very few are now still open outside of the public sector.

Now, instead of a pension guaranteeing a defined benefit at a pre-agreed retirement age, most pensions are based upon a defined contribution, which is built up and invested over time to provide a pot of money that can be accessed at retirement age.

The difference here is that there are a lot more variables to consider. In addition to the amounts contributed, many other factors will impact upon the size of this pot at retirement, and what it will provide at the point, including investment performance, interest rates, pension rules, and selected age at retirement (to name but a few).

Ultimately, this means that when someone can retire is a moving feast, and financial advice and planning can be the key to enabling retirement.

When we meet with someone looking to plan for their retirement, we will consider the following:

• When are you hoping to retire?
• What income do you require in retirement to meet your expenditure requirements, and
  ensure your standard of living?
• What resources do you have available to you in retirement (personal and occupational
  pensions, assets, savings, investments, other).

This will enable us to analyse what might be available to you at your target retirement age, taking into account the various assumptions and variables.

However, a key part of discussions these days is also making clients aware of the variables and the risks. If a pension value falls due to a market crash the month before they planned to retire, this could drastically impact upon the funds available over the long term in retirement.

This is where financial planning can help, as regular conversations prior to retirement can help to ensure that you are on the right path and making suitable decisions in relation to risk and timescale to ensure you are on target for your retirement. The sooner you start to consider this, the better.

Nevertheless, even with good financial planning, timing can sometimes make all the difference, and so these days, other options might still have to be considered. This is why we see moving retirement dates, or reducing hours to part-time to delay accessing pensions. Again, financial planning can assist with working out the best way to access pensions and investments over this period.

Overall, pensions have changed significantly and there is a lot more uncertainty in relation to
retirement ages and what you can expect at that time. A financial adviser can help work through this and help you make the most of the increased flexibility available from such pensions.Sometimes, this can lead to an earlier retirement!

Network Insurance & Financial Planning Limited can offer holistic independent financial advice so if you want to start planning for your retirement (and there’s no time like the present), please get in touch with us at advice@network.gg or give us a call on 01481 701400 and one of our qualified advisers will be delighted to get you started!