Fairly obviously, the era of final salary pension schemes has gone for good. But what is much less obvious is how individuals should now go about replacing that assurance of a reliable and adequate post-retirement income.
As a new member of the team here at Monevator, it’s my job to help you figure out your own approach to this seismic change in our collective prospects for retirement.
And precisely who am I? Am I — gasp — a pensions pundit, fresh from yet another soundbite in the Daily Telegraph? A guilty-feeling IFA, perhaps? Or an employee of a pension firm, forced to moonlight as a blogger as would-be retirees stay away from annuities in droves?
Er, no. I’m none of those things. I’m an investor, as it happens, and probably little different from you.
But — and I recognize that this may be my most relevant qualification for the role — this month I turn 60.
So I have a keen interest in finding not just easy answers to the retirement conundrum that faces us all, but the best answers. Answers of direct relevance to your circumstances, as well as mine.
Together, we’re going to navigate this brave new world of deaccumulation, SIPPS, annuities, flexible drawdown, and all the rest of it.
A different landscape
When many of us entered the workforce, final salary schemes were the norm. You’d work until you were 65 – 60 for women — and then retire on a pension that was calculated as a fraction of your salaried pay.
No longer. The vast majority of private sector employers have ditched their final salary schemes, transferring employees to ‘money purchase’ schemes, which leaves employees — and not the employer — carrying the risk of any investment downside.
Retirement ages, meanwhile, have been jacked sharply upwards.
My own state pensionable age is now 66, not 65. My wife thought she was going to retire at 60; now, as a public sector employee, she’s expected to work to 62.
And a close friend in her late 40s — also a public sector employee — now finds herself due to retire at 67, thanks to the way that public sector pensions calculate pensionable service.
More miserable years
Plus, as a nation, we’re also living longer. And those increased retirement ages are partly a response to that, of course.
But more particularly, our increased average longevity is regularly cited as one of the reasons behind tumbling annuity rates — which is another aspect of the changing retirement landscape, of course.
It’s the scale of that increase in longevity that is frightening. According to Office for National Statistics population projections and life expectancy estimates, nearly one in five of us will live to see our 100th birthday.
Good news, surely?
Well, not if you’ve cocked-up your retirement strategy, that’s for sure. Someone I know, in their late fifties, has this week just stuffed another £40,000 in their pension. Just as they did last year, and the year before.
Someone else I know, of a similar age, perhaps has total pension savings of that same amount.
Yes — £40,000.
A retirement composed of 30 or so years of baked beans and homebrew? No thanks.
You’re on your own
What to do? Roll it all together, and the picture that emerges isn’t comforting. It certainly isn’t a view of retirement that your father would have recognised.
Simply put, compared to our parents’ generation, each of us can expect to:
- Retire later
- Rely on our own savings for a greater part of our post-retirement income
- Require those savings to support us for longer
It’s the last of those that is giving me pause for thought. Because there’s a very real risk that my retirement savings will have to sustain me 25, 30, or even 35 years.
Which, put another way, is scarily close to the timescale over which the bulk of those savings were built up.
I certainly don’t want to join the beans and homebrew brigade.
Running on empty
There are no silver bullets. Despite the hype since the Budget, I don’t think that the changes to pensions and annuities announced on March 19th particularly help.
Giving pensioners more freedom to use their pension savings as they like — instead of being made to buy an annuity — doesn’t magically increase the size of a pension pot, or make it stretch further.
Indeed, by increasing the drawdown limit from 120% of the equivalent annuity income to 150% of the equivalent annuity income, there’s a real danger that some people’s pension savings will expire before they do. Especially for people in their 90s, or reaching 100 — the very point they can ill-afford a cut in income.
So as retirement landscapes go, it’s not a pretty picture.
Nevertheless, in the months ahead, I’m going to begin weaving my way through it. With you, Dear Monevator Reader, as a traveling companion.
Let’s have fun — and hopefully, retire richer.