Back when the state pension was first introduce in 1908, the average life expectancy for men was 54 and for women 61. Given that the state pension was only available at the time to people over the age of 70 that meant that many didn’t live long enough to receive it. However, now times have changed significantly – we are living longer. A lot longer. Girls born in 2016 have a life expectancy of 93 and boys 90. The potential requirement to fund pensioners for 30+ years has meant the state pension is on the downward slope. So, relying on the state pension to provide 100% support during the golden years is just not an option now.
Why don’t we have enough to cover retirement?
There are a number of reasons why so many people don’t have enough cash set aside for retirement.
The increasing costs of owning or renting property are eating into our budgets and leaving little left for retirement savings
Real pay levels have been stagnant for some time so many incomes are just not keeping up with costs to allow enough cash to spare
Employers pay less into pensions than they used to so pension pots are smaller
Left over debt from university can eat into income well into earning life
So what might retirement look like in the future?
Here are some possible scenarios for how our retirement could look like into the future:
No actual retirement. Many experts predict that ‘retirement’ might eventually fade out, as many simply won’t be able to afford to stop working. Instead, we’ll be working well into our 70s and 80s.
Phased retirement. A retirement date could well disappear as a concept and instead we’ll look to have a phased retirement where workload and income are gradually tapered off.
Part time working. As successive generations start to reach the age of retirement and realise that they simply don’t have enough in the pot to cover it, part time working among the 65+ age group could become a much more common occurrence.
The rise of the private pension scheme. Funding retirement used to be worked out through a combination of the state pension scheme plus perhaps a workplace pension. However, the state pension will barely cover basic needs for future retiring generations, defined benefit pensions have now almost completely disappeared and employers are contributing less and less to defined contribution pensions. As a result, the private pension is playing an increasingly significant role.
More innovative pension products. Traditional pension options are likely to expand so that there will be a range of different savings choices for younger generations who are starting to think about the future. The Lifetime ISA is a good example of the way that financial products are evolving in response to changing mortality trends.
Planning for retirement now
It is never too late to start planning for retirement. However, the later you do this, the harder it will be to accumulate the kind of cash you’re likely to need to sustain you through a much longer lifespan, with less state support. In terms of quantifying that ultimate end goal, financial experts say that in the end we will need a pension fund that is ten times the size of our final salary to enjoy those golden years. So, how do you start planning for retirement now?
Aim to contribute 12.5% of your pay each year into pension fund for 40 years. If you’re starting contributions later then you’ll need to increase this percentage, depending on when you want to retire.
Increase the range of saving options you have. Workplace pensions, private pensions, ISAs and investments all provide options for retirement income.
Pay off your debts. When you’re calculating what you’re likely to need to pay for in retirement this will be simpler if you’re not still paying off old debts.
Change your perspective on your career. In 40 years time we may need to work into our 80s if we eventually want to enjoy the same standard or retirement as our parents. So, when you’re choosing a career bear in mind the need for adaptability to the physical and intellectual aspects of old age.
Stay at home parents need to think ahead. 21% of women – compared to just 9% of men – don’t have their own personal pension provision. This is largely the result of the fact that childcare responsibilities still tend to fall predominantly on women. Any parent now staying at home – male or female – needs to think ahead to make up for the loss of pensionable income e.g. asking the working partner to pay into a pension so that both are covered during the years when childcare prevents one party from working.
Many older people are home owners living in an enormously valuable asset. This asset could potentially provide a means to find your retirement and/or pay for residential care should you need it. Accessing this value can be done without necessarily selling your home – you could consider a secured loan or equity release.
What happens if we carry on the way we are?
Right now, roughly one in seven people is retiring without any private pension. In 2017 that might be just about survivable but in 20 years time, when the state pension is almost worthless, that won’t be the case. The result could be retirement poverty on a huge scale. For everyone, funding retirement is an increasingly pressing concern and it’s only by retirement planning earlier in life that we can ensure we don’t end up with too little to live.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley