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Retirement is changing but is auto enrolment the answer?

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Tuesday January 28, 2014 at 10:00am
The majority of people I speak to do seem to acknowledge that they need to save for their retirement. Their commitment to doing so, however, is less certain.

The Government recognises that many people need ‘encouragement’ to invest in a pension. Hence the advent of Pensions Auto Enrolment, being rolled out across the country over the next few years. Although pension Auto Enrolment will increase the number of people who have a pension the general belief is that those pensions will be nowhere near enough to fund an adequate retirement. The reasons for this lie in the fact that these are effectively personal pensions with all the associated risk put on the individual. Typically people will not understand these risks.

Income in retirement is a function of:

  • money put into the fund over your working life
  • the growth rate that money achieves over time (growth rate is dependent upon risk or volatility taken within the fund)
  • the annuity rates at the time of retirement
  • the age of retirement and so the number of years the pension needs to pay out
Each of the above requires a level of understanding that many will not have. For example, the young may well forego paying into a pension in favour of paying a mortgage or socialising. However, this shortens the time they are then left with to save for retirement.

The investment risk and therefore volatility taken by the fund is not clear and it is not clear how the funds are going to be managed. Also the annuity rates available at retirement will significantly affect the income the fund produces regardless of final pot available.

Our concept of retirement has changed

The Office for National Statistics showed that by 2010 the average retirement age for women was 62.3 so over the state age of 60. The reason is that health has improved and so people want to work longer. If there is a solution to the problem, this is probably it! In this scenario part time work supplements a falling income due to retirement on a low pension. In other words part time work replaces the traditional concept of retirement where you no longer do any work and retire completely.

An independent survey commissioned by insurance company Met Life, showed that only 6% of people thought they were old at 60. Most thought old age for them would start in their 70’s. Also most people questioned in the survey thought they would not fully retire but would continue working past the age of 65. The general feeling was retirement would be more of a gradual change, a rebalancing of work and leisure time.

The survey also interviewed people who had gone straight from work into retirement. Over 50% of respondents said they missed being with work colleagues, and the money. They also interviewed people in their 50’s who said they expected to miss the money and colleagues most when they retired.

People want certainty in retirement

The report also looked at how well people understood the factors that determine income in retirement and unsurprisingly many said they did not. They did say they would prefer a clear understanding of retirement income and some certainty or guarantee around this. Although these answers sound intuitively correct we should also be not so surprised as Met Life are a large provider of guaranteed pensions.

If you are concerned about your income in retirement or indeed would like to understand more about guaranteed and non-guaranteed pensions then please get in touch.

Andy Parker
Chartered Financial Planner, Solihull

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