The pension freedoms have granted retirees the possibility of retiring on their own terms but low earners face the prospect of working longer while more pressure is piled on the state pension, writes Malcolm Small, executive chairman of the Retirement Income Alliance.
Rising life expectancy and healthier seniors, combined with the prospect of a 20 or 30-year retirement, is causing a reassessment of what retirement will mean in the future.
A number of commentators have suggested the concept of retirement will become increasingly flexible, with seniors taking the decision to work fewer hours over fewer days. Another option is to move to a portfolio of part-time employments, which allow for extended periods of holiday to be taken.
Pension funds could be drawn upon to fund periods such as later life gap years where pensioners spend time travelling or relaxing before re-engaging with the world of work. The arrival of the pension freedoms and choice, whereby pension funds can be accessed flexibly, subject to tax, have made this a possibility.
People can choose to work for longer to spend more time accumulating retirement savings for when full retirement is taken. Even then, after a period, a retiree could choose to come back to work: 70 is the new 60.
This narrative celebrates the choices open to people and the many ways they can support themselves while enjoying later life. Retirement is no longer fixed, it is flexible. This represents a positive vision of the new retirement.
The over-65s are a fast growing employment cohort in the UK, having doubled its employment rate over the past 15 years. This ignores those over 65 in self-employment, and there are likely to be many of them. Self-employment should suit older workers, as it can offer the flexibility to work when you want to.
There are holes in this sunny vision of later life. Those in manual trades may struggle. Many plasterers find their right shoulder joints wearing out in their late 50s. Any teacher will tell you it is a struggle, in today’s schools with all of their demands, to cope beyond their early 60s.
Senior executives and ‘knowledge workers’ may take on non-executive or consultancy roles, but for many this will not be an available option. Ill health will stalk many, making work of any kind impossible.
For these groups, they must fall back on their savings, and the future prospects for this are starting to look grim. Sofia Stayte, head of the independent state pension age review team at the Department for Work and Pensions, recently said that in its modelling, the state pension would be the main source of retirement income for all population deciles in 20 years’ time.
In other words, the income provided by private saving would be less, and for many, a great deal less, than the state pension.
Winners and losers
On the positive side, the effects of pension saving encouraged by auto-enrolment will kick in for most people, but by no means everyone, in around 20 years’ time. After that it will take another 20 years to recover to roughly where we are now. This is a worrying prospect that will only be ameliorated for those with residential housing equity to fall back on, although home ownership is in decline.
The conclusion is people with assets will have options. Flexibility in retirement will be a theoretical possibility and, in many cases, a practical one. But for those without much of an asset base, including residential housing equity, life looks a lot harder: and for those unable to carry on working, harder still.