Over the next twenty years, more people will move into retirement than in any previous 20-year period. Are you ready for this veritable retirement ‘tsunami’?
It will be easier to prepare for if everything was going to be the same as the retirement previous generations had experienced, but it won’t. Indeed, it will look very different.
For starters their state pension age will be later, meaning many will be looking to work later. Some will not be able to work or if they can, will be unable to find the work they want.
On the other hand, employers are no longer able to dismiss employees who reach a specified age if they are able to do the work they are employed for. Employers may also be flexible in their attitudes to employment to retain the services of those with key skills.
Next, the proportion with defined benefit pensions will reduce, and these may have been earned over a reduced period of service generating smaller amounts of guaranteed income. Also, those pensions may not align with the age at which retirement commences.
The amounts held in defined contribution pensions will also be greater. These increased amounts, however, will not compensate for the reduced defined benefit pension entitlements.
Also, thanks to auto-enrolment, the numbers with no pension provision will be smaller. It will be many years before these entitlements are large enough to be regarded as a ‘pension’. For this purpose let us define a pension as providing a lifetime income in retirement.
To meet the lifetime income test, two criteria must be satisfied. The first is that the rate of withdrawal must be able to be maintained for as long as the recipient is alive. To meet this test £1 a month will require pension savings in excess of £300.
The second test is that the amount received must be meaningful to the recipient against the alternative of a lump sum or several lump sums that can be spent on something meaningful. This is in the eyes of the recipient. To a few people, £50 a month will satisfy that test. This will require at least £15,000 in the pension pot today. Many will require a greater income than £50 a month of course on top of their State pension.
The average pension pot of £50,000 will provide a little over £150 a month. But, for how many people will this be enough?
So much for pensions. What about other assets and sources of wealth? For instance, this group of people moving into retirement hold more in housing wealth than pension wealth. Currently, 70% of pensioners own their home. The number of new pensioners owning their own home will reduce slowly over the next twenty years. What’s more, we should expect a greater proportion that have not fully paid off their mortgages.
Not only will the new cohort of pensioners live longer than their predecessors, but their parents are living longer. This means that those waiting for inheritances will have to wait longer. This is always assuming that the inheritance has not been depleted by the cost of care, for example.
Care provision will hit this new cohort in other ways though. They may have to stop working earlier than planned to care for an elderly relative. This will produce a double whammy. A greater strain will be placed on their own pension savings by reducing the period over which they can save. Their pension savings will also have to provide a lifetime income over a longer period.
What is more, they themselves may end up requiring care, or they may have to provide care for their partner, in their later years.
So how should we prepare for this ‘tsunami’? We must expect that more people are going to need help with more complicated situations as they move into retirement. Standard solutions may not be appropriate to more people.
More worryingly it would appear that those who will be most in need of help will be those who are least likely to be the typical customer of a financial adviser. It is also hard to envisage what services a conventional IFA would have to offer them.
This means they might end up making costly mistakes by going for solutions that are not appropriate to them. This is the retirement advice gap and I still believe that it represents a considerable opportunity for those advisers who can embrace the range of products and services this new cohort require.
Get it right now and the demand should be considerable for 20 years-plus.
Bob Champion is chairman of the Air Later Life Academy