Approaching retirement? Be prepared for the Government to move the goalposts. The pensions minister Steve Webb has warned that we are living longer, and the retirement age must be increased to match this.
The average age of retirement is currently 65 for men and 63 for women, but the Department of Work and Pensions has set out plans for this to rise by six month every year. The number of people in England aged 65 or older is expected to increase by 50% over the next 20 years. But the economy is not strong enough to support this growing sector of society, and to stop the public purse being dragged further into the red, State Pension age must rise to reflect demographics.
Webb said that if someone works just one more extra year they can add an essential 10% to their pension for life.
“What we are doing is catching up with decades of longer living. We are living longer but the labour market and people’s retirement age has not been keeping up. I have fought against a vague target of trying to get people to work longer to have something more specific,” he explained.
The pension age for women has already risen dramatically in recent years, and although Webb admitted the six months a year target was “ambitious”, it is an extension of an existing trend.
David Macmillan, managing director at Aegon said better life expectancy must mean working for longer, as the same pension pot cannot be expected to last twice as long.
“People already accept the need to work to a later age and our research indicates 50% of people intend to opt for a phased retirement whereby they gradually reduce the number of hours they work before fully retiring,” he said.
Workers who wish to retire younger than 65 simply need to make sacrifices earlier in their working life to up cash contributions to a workplace or private pension scheme.
“People can either choose to keep working for longer, or save more at an early age but either way our research indicates that savings rates urgently need to increase as only 7% of people in our survey are currently on track for the retirement income they’d like,” said Macmillan.
Pensions Industry Faces a Decade of Change
Pensions minster Steven Webb said that he would be watching the retirement industry “like a hawk” over the next 10 years, as pension providers adapted to the reforms.
In March’s Budget, Chancellor George Osborne launched a pensions freedom initiative, scrapping compulsory pensions. This will mean pension providers will have to come up with innovative savings schemes that can adapt to savers needs.
Default pension schemes currently target gilts for annuity purchase, but this will have to change. Add to this, investment managers will no longer have the simple task of tapering risk towards retirement age as scheme members may not want to drawdown their funds until 10 years after retirement; meaning they will want a decade longer invested in growth assets.
Webb predicted that the vast majority of people need their accrued retirement pot money to live off so for the foreseeable future most people won’t actually have a huge amount of choice.
“They may take an annuity a bit later and it could be more flexible. I think this will evolve as pension pots grow so while some are talking about innovation next April, we face a decade of innovation to be honest,” he said.
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