I was struck by a recent headline in Actuarial Post, ‘Six in Ten Consumers puzzled by their pension pots’. The article was based on research conducted on behalf of Penfold.
The study found that 54% of those surveyed have three or more pensions, with 58% having no idea how much was in their pensions. Other findings were that nearly 40% are unaware of what income they require for a comfortable retirement and many seriously underestimate the amount they will need in their pension pot.
The numbers may be distorted by covering all age groups – how many 29-year-olds are thinking of retirement? They have other more important issues to consider. Of those who should be beginning to think about the next chapter of their lives, only 24% of over-55s was confident about locating and accessing their pensions. This of course means, rather worryingly 76% were not.
Retirement is a huge life-changing experience. While working, you receive a regular income. Depending upon the nature of the employment the income may fluctuate but you learn to live around the fluctuations.
For many over-55s, the future is uncertain. How secure is their employment, especially if they are furloughed? Worse, many have already lost their jobs due to the economic effects of the pandemic. This age group find it most difficult to find meaningful replacement employment.
My definition of meaningful employment is employment that generates a commensurate income to that which was being received before the job loss. Those who do not find meaningful retirement are going to have to consider how they are going to manage. Have they involuntary been retired or partly retired?
As soon as someone mentions retirement the first thought is to draw on pensions. This puts a great strain on the pension. It could be short of five or more years’ contributions to what was originally planned, short of the same period of investment growth but expected to pay an income over that longer period.
The starting point for an involuntary retirement should be to reduce outgoings. Can mortgages, loans, and credit cards be consolidated into an interest-only mortgage? Would an equity release lifetime mortgage with flexible repayment terms be an option?
Flexible repayment terms may be required in future as employment prospects for this age group improve over time and a return to meaningful employment may come about. This will require a re-examination of the client’s financial prospects and retirement plans at that time.
To increase the prospects of a return to meaningful employment; to improve personal confidence and maintain healthy living, some form of employment or voluntary work should be considered. This improves networking possibilities to hear of those employment opportunities that do get advertised. Any income that is received will help the involuntary retiree.
Only now should savings and pensions be considered. This is what brings us back to the 76% of over-55s who are not confident about locating and accessing their pension. What do they have? What options are available? What is the effect on drawing any defined benefit pensions early?
The involuntary retiree may qualify for State benefits if they are looking for work, or in low-paid employment. Until State pension age, pensions do not count as savings for means-testing purposes. But if savings are run down to get below the limits, the individual may fall foul of deliberate deprivation rules. This could be a complicated balancing act for anyone giving guidance.
Also, if the hope is return to meaningful employment, the person giving guidance or advice needs to avoid triggering the Money Purchase Annual Allowance which could restrict payment of future contributions to £4k per annum.
While it is disappointing that so many have little understanding of what is in their pensions and their options, it must be remembered that retirement often never goes to plan and it important that all aspects of financial well-being are considered when the time comes to think about drawing on the pension(s). This includes debts, housing wealth, other savings and State benefits, in addition to their pensions.
It looks like that many over 55s may be facing a difficult few years. They are going to need the help of quality holistic advisers, therefore, more than ever.
Bob Champion is chairman of the Air Later Life Academy