Independent Financial Advisers Glasgow News & Guides

New research published by the Institute of Directors (IoD), in association with Lucida, has revealed that the many people are choosing to save for their retirement with ISAs rather than pensions.

The trend is illustrated by the fact that the amounts paid into ISAs increases sizeably year on year, rising from £35.7 billion in 2007, to £43.9 billion in 2009/10, while employee and individual pension contributions peaked in 2007 at £25.6 billion, and fell to £22.9 billion by 2009.

This trend seems set to continue or even accelerate, with payments into ISAs jumping by almost £10 billion to a total of £53.8 billion in 2010/11.

The report, “Roadmap for Retirement Reform”, written by IoD pensions expert Malcolm Small, explores the scale of the challenge posed by an ageing population, a society habitually dependent on debt, low savings rates and high numbers of people with little or no pension provision. The key proposals put forward to address this situation include:

• Raising the state retirement age to 70 sooner than is currently planned – by raising the age to 68 in 2032, 69 in 2038 and 70 in 2044. The Government currently plans to raise the retirement age to 68 in 2046.
• Providing a single, flat-rate, universal, basic state pension, abolishing means-tested retirement income benefits such as Pension Credit.
• Radically reforming and simplifying the pension architecture, which has become hugely complex, unattractive and enmeshed in a forest of regulation.
• Developing a formal UK Government savings policy – the Government currently has no over-arching policy to encourage savings, despite the stark lessons in recent years on the danger of over-indebtedness

A new report has revealed that the UK’s ‘Retirement Nation’, which includes all retired people, saves the state and society at least £25 billion a year through unpaid care, community and voluntary work.

However, the report, ‘Our Retirement Nation’, which was commissioned by MGM Advantage, warns that the contribution made by this part of society is not fully recognised and that the government and society as a whole need to do more to understand their emotional, health and financial requirements.

MGM Advantage is calling for fundamental changes to ensure that the Retirement Nation gets the respect and support it deserves from society, the media, the financial services industry and the government. Its recommendations and key findings are:

• Respect – A change in attitude towards the Retirement Nation and greater recognition for retired people and what they contribute to the UK – only 14% of retired people feel valued by society.
• Representation – The Retirement Nation is a big part of the UK society for what they contribute (£25 billion through unpaid care, community and voluntary work), but also the help and support they need. The Retirement Nation needs a voice. MGM Advantage recommends the Government creates a Minister for Retirement.
• Education – More done to help people maximise and make the best use of their financial wealth in retirement. The first step is to help people improve their basic knowledge about retirement and finance – 31% of retired over 55s have not heard of the Open Market Option.
• Simple products – Financial services and government need to continue to work together to innovate and design new retirement products that meet the needs of the Retirement Nation and are easy to understand, accessible, and offer good value – only 29% of over 55s know exactly what an annuity is.
• Ownership – People need to take ownership of their retirement planning – from building up a pension pot in their 20s and 30s to making the best retirement income decision when they retire – 54% of non-retired UK adults are not at all prepared for retirement.

More than 10% of people who had planned to retire during 2012 are making alternative arrangements and putting off drawing their pension for the time being, according to the latest results from Prudential’s Class of 2012 research.

Of those deferring their retirement, a third claim they do not want to retire yet, while two thirds say they are putting it off because they can’t afford to retire as originally planned.

However, showing that giving up work before growing too old is still an aspiration for many, the average age of people planning to retire this year is 60 years old – a similar age to last year’s survey and seven months younger than in 2010.

Vince Smith-Hughes, Prudential’s retirement income expert, said: “One thing this year’s retirees have in common is actively making choices about when and how they will retire. Although many people think the idea of retiring as early as 60 is out-dated, the majority of this year’s retirees are defiantly sticking to that plan. It’s likely that many of these people will have accumulated benefits in final salary pension schemes that generate an acceptable income in retirement – perhaps signalling that the golden era of retirement for baby boomers isn’t over yet.

“It is, however, undeniable that there is a new retirement reality for a significant number of retirees. People are living longer, and for many, the very real prospect of a thirty year retirement is either unpalatable or unaffordable, hence the decision by many to continue to work. Retirement is also becoming a more opaque concept, with many people working part-time, either out of necessity or desire.

“To stand the best chance of having a comfortable retirement, which starts when you want it to, it’s important to seek professional financial advice on saving for a pension and on what post-work income options are available. Saving as much as you can as early as you can will help you to gain more control over your retirement."

New statistics published by the Office for National Statistics reveal that that people are working longer than they used to. The average age at which people leave the labour market – a proxy for average age of retirement – rose from 63.8 years to 64.6 years for men and from 61.2 years to 62.3 years for women between 2004 and 2010.

This average summarises information about the ages at which people stop working, which differ for different people. For men, the peak ages for leaving the labour market are 64 to 66 years. For women, the peak ages are 59 to 62 years. Thus, retirement peaks around State Pension Age (SPA) for both sexes; but many people retire before SPA, and others work beyond SPA.

In 2010, there were 3.2 people of working age supporting each person of SPA and over in the UK. Without any changes to SPA, this ‘old age support ratio’ would drop to 2.0 by 2051, but under current legislation SPA has already begun to increase for women, and SPA for both sexes will rise to 68 by 2046. When these SPA changes are taken into account, the old age support ratio is projected to fall less, to 2.9 by 2051.

Women’s life expectancy at SPA will decline over this decade as their SPA rises. Between 2021 and 2051 life expectancy at SPA is expected to rise gradually for both sexes, because, following a change in the assumptions for future life expectancy in ONS's 2010-based population projections, life expectancy at the relevant ages is now projected to increase at a slightly faster rate than the increases in SPA contained in the Pensions Acts 2007 and 2011.

There are inequalities in life expectancy between social classes. The latest estimates for England and Wales show a gap of over three years in life expectancy at age 65 between the highest and lowest classes in the National Statistics Socio-economic Classification (NS-SEC). Within the UK, life expectancy at age 65 is highest in England and lowest in Scotland.

Nearly one in five of those planning to retire this year will do so with outstanding debts, according to new figures released by Prudential. The Class of 2012 research looks at the finances and expectations of those planning to retire this year, and found that the average amount owed by debtor retirees is £38,200.

The proportion of people retiring in debt this year (18%) has fallen slightly from 20% in 2011. However, the average amount owed has increased by more than £5,000 from last year’s figure of £33,100 per person retiring with debts.

Outstanding mortgages and credit card bills make up the bulk of the Class of 2012’s debt. Half of those with debts owe money on their home loan and more than half (51%) are struggling with outstanding credit card bills.

The results of the survey also give an insight into the effects of outstanding debt on the finances of a new retiree. On average, those planning to retire this year with debts will be making monthly repayments of £260, which equate to a fifth of their expected £1,290 a month income.

Paying off debt could take this year’s retirees an average of nearly four years and 8% of those who will still owe money when they retire in 2012 say that they will never be able to pay it off. One in four say that they will be making repayments of £500 or more a month.

Men retiring in debt this year are likely to owe substantially more than women, with average debts of £45,300 compared with £29,400 for women. Around 20% of men expect to have debts when they retire compared with 16% of women.

A generation of 'Wearies' – Working, Entrepreneurial and Active Retirees – could be forced to continue working into their seventies and beyond due to hardships caused by the looming pensions crisis.

Effectively ruled out of employment by age, they will set up their own businesses, according to the study for Friends Life by think tank Future Foundation. Many of tomorrow's OAPs will look to supplement their retirement savings by becoming self-employed in their later years.

Many are likely to supplement their income buying and selling goods on websites like eBay, while others will turn their front rooms into offices or cottage industry workshops or a nursery. Those with manual skills might set up gardening or home help businesses to make money helping neighbours, academics predicted.

Martin Palmer, head of corporate benefits marketing at Friends Life, said:

"We're expecting the traditional image of the pensioner with slippers and rocking chair to change completely.

"Many will not have saved adequately for a secure retirement and, with years of fiscal austerity taking their toll, by 2020 many people in their seventies simply will not be able to afford to give up working.

"Necessity is the mother of invention and Wearies will be among the most innovative and entrepreneurial contributors to the UK economy, despite their senior years."

People from across Britain were asked about their attitude to working in retirement as part of the study, entitled "Pensions: Crisis and Reforms".

Over half (51%) of those who are already retired said they would be prepared to do part-time work to boost their pensions. But the figure rises to three-quarters (75%) among those who are yet to retire.