Liz Booth explores how Covid-19 has impacted the nation’s health and wealth
The past year has been a struggle for almost everyone, with those suddenly unable to work among the worst affected. But even those busy at work have been battling fatigue brought on by coping with new stresses.
Now, increasing numbers of experts are pointing to the links between health and wealth and underlining the dramatic changes wrought by Covid-19 upon us all. The Financial Conduct Authority (FCA) has long championed support for the vulnerable, but some experts have even gone as far as to say that everyone living in the UK could be classed as vulnerable now, as they work out how to move forward in the Covid-19 era.
That matters because the FCA has found there is a direct correlation between health and wealth. It points to research which suggests those in poor health are less likely to have a bank account or savings products of any kind. The under-65s in poor health are also less likely to have a mortgage, with less than 400,000 such adults (18%) having a home loan, compared to more than 16 million (42%) of those in good health.
When it comes to other types of credit, the FCA says those of working age who are in poor health are far more likely to be using high-cost credit (28%, compared with just 12% of those who are not in poor health). While proportionally fewer however, the latter still amounts to more than 4.5 million adults. Those in poor health are also almost twice as likely to be relying on friends and family for their borrowing (22%, compared to 12% of those in good health).
The broad conclusion is clear, says the FCA: people of working age with poor health entered the period of the pandemic with much lower levels of financial resilience.
Added to that, there has been a clear shift in working patterns through the pandemic. While most of us have been forced to work from home, some of us will not have an office to return to because we have launched ourown ventures.
The Institute of Fiscal Studies (IFS) reports that self-employment has risen dramatically in the UK. This increase has been entirely driven by ‘solo’ self-employment – sole traders and owner-managers with no employees. By the end of 2019, there were nearly four million solo self-employed workers, up from 2.3 million in 2000. The level and growth of solo self-employment in the UK are among the highest in Organisation for Economic Co-operation and Development countries.
Xiaowei Xu, a senior research economist at the IFS and an author of its report, says: “Taken together, the evidence in our report suggests that solo self-employment is often a fallback option for workers who face bleak prospects in traditional employment. Covid-19 has now made these prospects even worse.”
This matters because, according to the IFS research, the solo self-employed earn less than employees on average and the gap has widened over time. Average (median) pre-tax earnings in 2018-2019 among the solo self-employed were 30% lower than among employees.
The IFS research also reveals that the proportion of the working-age self-employed saving into a private pension has declined dramatically in the last two decades, from 48% in 1998 to just 16% by 2018. This suggests there are currently more than 3.5 million working age self-employed who are not saving into a private pension. In sharp contrast, pension saving among employees has increased since the introduction of automatic enrolment – in 2018 nearly 80% of working-age employees were contributing to a pension.
So, this is not necessarily a good time to hear that the pandemic has pushed more than 154,000 55- to 64-year-olds into early retirement.
Research from pensions and retirement specialist LV= highlights how the coronavirus pandemic is disrupting the UK’s retirement plans. The LV= Wealth and Wellbeing Monitor – a quarterly survey of 4,000 UK consumers – indicates that more than 154,000 people aged 55-64 have opted for early retirement because of redundancy and reduced income, a desire to reduce their risk of exposure to Covid-19, or the pandemic has made them reassess their priorities in life.
22% of people in poor health are relying on friends/family for borrowing compared to 12% who are in good health Source: FCA 2021
The LV= survey found that people are generally unprepared for retirement, and that retiring five years early can significantly reduce income in retirement. The LV= research (among those who were still working at the start of 2020) reveals:
- 3% (154,000) of those aged 55-64 have taken early retirement due to Covid-19.
- 6% (313,000) of those aged 55-64 said they will retire later than planned to save more for retirement.
- 4% (211,000) people aged 55-64 have accessed some of their pensions savings to supplement their income because they have been made redundant or their earnings are reduced.
The research highlights how unprepared people are for retirement. Only a small proportion have looked at their pension value in the last year or researched how much they need to enjoy the retirement they want.
The LV= research of UK non-retired adults reveals:
- 86% (32 million) of UK non-retired adults have not checked the value of their pensions in the past year.
- Among those planning to retire in the next five years, 75% have not looked at their pension value in the last year.
- 59% (22 million) are not confident they will have saved enough for a comfortable retirement.
- One in three (34%) who are planning to retire in the next five years are not confident they will have saved enough for a comfortable retirement.
- More than one in 10 (11%) non-retired adults believe they will never be able to afford to retire.
Clive Bolton, managing director of savings and retirement at LV=, comments: “Early retirement is attractive for many people – but it can become a financial nightmare if it is forced on people without any planning because of redundancy or illness. Early retirement is expensive. Stopping work five years early means five years’ fewer contributions into a pension, five years’ fewer compounding of returns on any retirement fund and an additional five years withdrawing money from the pension.”
28% of adults in poor health are using high-cost credit compared to 12% who are in good health Source: FCA 2021
There are some options available to suggest to clients, however. Here is what people considering early retirement could do:
- Check the age at which they can get the state pension and how much they’ll get – the full new state pension is £175.20 per week.
- Calculate the pension income they will need for essential day-to-day spending in retirement.
- Work out if they will have the amount needed in their pension by the desired retirement age.
- Consider increasing pension contributions – the tax advantages of pensions make them one of the best ways to save for retirement; tax relief means it costs £80 to have £100 go into a pension, or a cost of £60 for £100 of pension savings if the individual is a higher-rate taxpayer.
- If a client is made redundant near retirement age, consider diverting redundancy payments into a pension; it can be a tax-efficient way to boost retirement funds.
Liz Booth is contributing editor of PFP
Image credit | John-Holcroft Ikon
How retiring five years early can affect your retirement income
Pensioner aged 60 is planning to retire at 65. He earns £45,000 a year, his pension fund is worth £250,000 and his total pension contributions are 10%.
By 65, his fund size would have grown to £329,000 and he could have drawn an income of £18,700 per year to last 30 years till he was 95.
But at 60 he is made redundant and decides to retire. His fund needs to last 35 years until 95. To ensure his fund lasts, he will have to reduce pension drawdown by £5,500 a year to £13,200 a year.
Example assumes: Pensioner dies at age 95. Net fund growth is 4% a year. No tax or inflation assumed on income. He draws down £13,200 p.a. from age 60.