The cost-of-living crisis and politics are playing havoc with many people’s retirement plans, as Liz Booth reports
The number of people receiving the state pension in the UK has risen by 1.1% to 12.5 million, according to the Department for Work and Pensions – something that is of little surprise as the baby-boomer generation retires.
But retirement is a difficult choice for many in the face of the cost-of-living crisis and a changing political appetite on pension payments.
And for those with a private pension, it is still not as straightforward as it once was. In November last year, BDH Sterling noted: “The effect of the cost-of-living crisis could mean £2.5bn of ‘lost’ pension contributions. This is the startling figure revealed in the latest Retirement Report published by Scottish Widows.”
The report also reveals that:
- 11% of UK adults have already cut back or stopped their pension contributions.
- If the average reduction of £47 each month is maintained for a year, it could result in more than double that amount being lost at retirement.
- The cost of not raising contributions again after the current crisis ends could mean ‘lost’ contributions of £7,000.
Despite those figures, it is clear retirees need another income beyond the state pension. A recent Pensions and Lifetime Savings Association report says pensioners need at least £12,800 a year to live with dignity and cover basic needs – an extra £2,000 on top of the state pension.
Last year, the average cost was £10,900.
Under pressure
Simpson Financial Services is among the financial planning experts warning that individuals who choose to retire now will need higher levels of savings to see them through.
“The cost-of-living crisis will affect everyone at every stage of life, because incomes are remaining static while the costs of goods and services have gone up,” the firm’s experts say.
“All incomes are under pressure. It doesn’t matter what type of household or how the income is earned – salaries, pension plans, savings, investments, or an annuity.”
All incomes are under pressure. It doesn’t matter what type of household or how the income is earned – salaries, pension plans, savings, investments, or an annuity
The UK is not alone in its pension woes – in France there is an expected €13.5bn (£11.9bn) shortfall by 2030 unless changes are made and, controversially, the government is trying to raise the retirement age from 62 to 64. And in Germany, people already have to wait until they are 67 to receive the state pension.
The US is no better off. Nicole Lehman of Clever, a US real estate data company, says a new study shows “the average American retiree has $170,726 (£139,962) saved for retirement – about 10% less than the $191,000 (£156,583) they had at the start of 2022”, adding: “This is just 31% of the $556,400 (£456,142) that experts recommend.”
Back in the UK, the government has already confirmed plans to raise the age threshold for receiving pensions in the next couple of years. From 2028, someone will become a state pensioner once they reach 67 years of age, for those born on or after April 1960. Furthermore, there will be a gradual increase to 68 between 2044 and 2046 for anyone born on or after April 1977.
Under the Pensions Act 2014, the government is legally obligated to review the state pension age on a regular basis. In the government’s first review in 2017, it was found that the next review should debate whether the increase to age 68 could be brought forward to 2037-2039.
According to the law, the next review of the state pension age must take place in early 2023 and be published by 7 May 2023 – watch this space.
Political concerns
The triple-lock was introduced to the UK state pension in 2010, to guarantee that the state pension would not lose value in real terms and that it would increase at least in line with inflation. The three-way guarantee was that each year, the state pension would increase by the greatest of the following three measures: average earnings; prices, as measured by the Consumer Pricing Index; or 2.5%.
In November 2022, Rishi Sunak confirmed the triple-lock would continue, but for how long remains a politically contentious issue. The government has said it will stay in place until at least 2024.
As experts have been pointing out, if pensions increase again in 2024 in line with inflation, pensioners could receive more than the existing personal tax allowance threshold (which is frozen for some years to some). This would mean pensioners paying income tax on a portion of their pension – an administrative nightmare for them and the tax authorities.
Demographics play a huge part in this conversation and there are signs that life expectancy has stalled – something that would legally oblige the government to change tack on the pensionable age.
But there are other factors at play too. During the Covid-19 pandemic, many people chose to retire early on a lifestyle basis. That was a choice for the comfortably off, it appears. The Office for National Statistics (ONS) shows that in the period from 10-29 August 2022, based on adults aged 50 to 65 in Great Britain who have left or lost their job since the start of the pandemic and not returned to work:
- The majority (66%) owned their homes outright and were more likely to be debt-free (61%), compared with those who left their job since the pandemic and returned to work (42% debt free).
- Financial resilience varied by age: those aged 50 to 54 were significantly less likely to be debt-free, excluding a mortgage (49%), compared with those aged 60 to 65 (62%) and more likely to have credit card debt (39%, compared with 24%).
- More than half (55%) of those aged 60 to 65 were confident or very confident that their retirement provisions would meet their needs, compared with just over one-third (38%) of those aged 50 to 54.
- Age was also a factor when considering whether to return to work; the younger cohort were more likely to say that they would consider returning to work (86% for those aged 50 to 54, 65% for those aged 55 to 59, and 44% for those 60 to 65).
- Adults aged 50 to 59 were more likely to report mental health reasons (8%) and disability (8%) as a reason for not returning to work, when compared with those aged 60 to 65 (3% and 3%, respectively).
- Adults aged 50 to 59 (14%) were also more likely to be currently looking for paid work, compared with adults aged 60 to 65 (6%).
However, that takes us back to the point about the cost-of-living crisis.
The Financial Times was among those reporting that, by the end of 2022, and according to the ONS, the number of people over 65 in work or looking for work hit close to 1.5 million during the summer – the highest level on record – before falling slightly of late.
Delaying retirement
Research from Legal & General confirms that 38% of those in their late 50s or early 60s are opting to put off retirement for at least another year, following the pandemic and current economic conditions.
Legal & General research also shows nearly one million people are considering annuities for the first time to guarantee stable incomes, avoid market volatility and make the most of higher rates. However, misconceptions about the product are still high, as 44% of people want a guaranteed income in retirement but less than half recognise an annuity as a potential solution.
However, Lorna Shah, managing director of retail retirement, Legal & General Retail, stresses: “Despite annuities becoming more popular, we still need more awareness of the flexibility of fixed-term annuities and the benefits of enhanced annuities. Our research shows there is still a lack of understanding about what an annuity is and what it can offer. This means people risk having an ‘either, or’ approach to funding their retirement, when in fact a blended approach might be more suitable.”
A further opportunity for financial planners to show their value.
Liz Booth is contributing editor of PFP
