With new statistics showing that 1.4m people of pension age are still working, we look what people should do to be able to retire
Will you ever be able to retire? The number of people working past state pension age has nearly doubled in the past 18 years, according to figures released by the Office for National Statistics.
Some work for social interaction, job satisfaction and to provide structure to their lives. But Ros Altmann, director general of Saga, says many are forced to work for an altogether more worrying reason: they simply don’t have enough to live on if they retire. This, she says, “may be especially true for women who may have returned back to work from taking time off and have very little pension provision”.
Darren Philip, policy director at the National Association of Pension Funds agrees: “Having more older people in the workforce will become the norm. Many are choosing to ease into their retirement for social and financial reasons, and part-time work is a popular option.
“The problem comes when people want to retire but end up stuck at work because they cannot afford to leave. With half the workforce not saving into a pension, this is going to become a painful reality for millions.”
The average 50-year-old intends to retire at the age of 61.5 years, having paid off their mortgage at 58.5, according to the insurer MetLife. This is highly unlikely to happen, though: MetLife points out that the same average 50-year-old has £54,300 saved in their pension funds, less than half the £122,800 they would need to generate about £7,000 a year in annuity income. That, in addition to the basic state pension, should just about add up to an annual income of £14,400 – the poverty line as defined by the Joseph Rowntree Foundation.
Even if you are saving hard, the crisis in Greece and Spain is making matters worse. Unless you belong to a final salary or defined benefit pension scheme, your savings will have been hit by the stock market turmoil.
Incredibly, some of those entitled to join a defined benefit scheme – regarded as the crème de la crème of pensions – are not taking advantage of the opportunity. Others believe their scheme will not provide enough income, according to research by Scottish Widows.
Ian Naismith, head of pensions for the insurer, says: “We’ve seen a significant increase this year in public sector workers [who are most likely to have the option of joining a final salary scheme] who say they’re not currently contributing to any pension – up from 14% to 19%. However, we think an equally significant factor may be loss of confidence. Only 37% are confident that their scheme will pay out as planned, and only 42% believe their main income will come from a defined benefit pension, down from 51% last year.”
It is difficult to think about putting money towards retirement when prices are rising and salaries are not. But it is vital if you want the option of retiring with a decent standard of living. So how should people in different sectors of the work market approach this problem?
People running their own businesses are the least likely to be saving towards their retirement, with just 36% putting anything into a pension. One fifth of those questioned for the Scottish Widows survey believed the bulk of their pension would come from a defined benefit scheme, indicating they expect to survive on contributions to pension schemes run by previous employers.
Naismith says: “For someone running their own business, the priority is to make it successful and that may take up all their financial resources. They may also feel that they can help fund their retirement by selling their business at some stage, but they should bear in mind that their business may not raise the amount they expected, or could even fail. The government is planning to raise state pensions for self-employed people, but only to about £7,300 a year.”
Cyrus Tchahardehi, 37, launched an online hospitality training and networking business, Rehoba, in 2011 after leaving his job as a wine supplier. He says: “While I love having my own business, saving for retirement was easier when I had a company pension plan. I managed to save around £45,000, all of which has gone into the business.
“I will reassess my situation once all of my borrowings are reimbursed. I don’t really know at what age I would wish to retire, but ideally I see myself retiring in my early to mid-fifties and dabbling in a few businesses.”
Martin Bamford, a chartered financial planner with independent financial adviser Informed Choice says: “Cyrus should focus for a few years on achieving profitability within the business and then work with his professional advisers to understand the most tax-efficient ways in which to extract these profits by making pension contributions. Cyrus appears to display the typical entrepreneurial mindset when it comes to taking risks with his money, so he might want to take less risk within his pension funds to balance things out.”
Private sector employee
The average income someone in the private sector expects to retire on is £24,370, according to the 2012 Scottish Widows pensions report. While this is slightly below the UK average, it is nearly double the £13,000 that the average saver retiring at age 65 is actually set to receive. One in 10 would like to retire at 55, but 24% think they will only be able to retire when they are 70 or over.
Robert Jessel, a 31-year-old copywriter who lives in south-west London with his wife, an academic, admits he will “probably never be able to stop working entirely”. The couple do not own their own home, and Jessel says that while he had an occupational pension for three months in his last job, it will probably take the introduction of auto-enrolment – the automatic opting in of staff into their employer’s pension scheme – before he starts saving again.
“The current economic climate is a big shock to people my age. I grew up and had my first job in boom years. Now we’re just trying to get by. I won’t really be able to save anything until I’m earning £40,000, but my wife has completed her PhD and is looking for a job. That should help.”
Bamford says: “Robert is not alone in waiting to be forced to save for his retirement. But the introduction of auto-enrollment is unlikely to encourage him to save at the level he needs to have a financially secure retirement. A plan based on continuing to work forever is rarely practical or realistic. Sickness or lack of work are both factors that tend to force people into retirement much earlier than planned.
“At 31 years old, Robert is young enough to make a real difference to his retirement if he is prepared to save. But if buying a first home is his priority, he still has a few years before he really needs to start worrying about tying money up in a pension. In the meantime he should save what he can in flexible and accessible cash savings accounts and Isas.”
Public sector employee
Nearly half of public sector workers would like to retire at the age of 60 or younger – well below the government’s planned retirement age for public sector schemes. Yet 37% of those questioned for the Scottish Widows survey are putting aside nothing in addition to their occupation pension to enable this to happen.
Many are worried they will end up with less retirement income following the government-instigated changes to public sector final salary schemes, but according to the research more than half say they are unable to save to improve their retirement income.
Anna-Marie Jones, a performance analyst at Brighton and Hove City Council, contributes £172 a month towards her public sector final salary scheme. She says: “I will always work and want to work in the public sector. But I can’t afford to contribute to another pension scheme, and although I do have regular savings, I want to be able to access them at any time if there is an emergency.”
Jones is doing the right thing, Bamford says: “You would expect Anna-Marie to be in the most financially secure position in retirement. Despite the latest series of reforms, public sector pensions typically offer the most generous benefits of any type of pension scheme.
“Anna-Marie will receive a projected benefit statement once a year which she should review carefully. And as she gets closer to her retirement age, it will become easier to understand how this pension income will support her desired lifestyle in older age. Making regular savings to create a cash fund alongside her pension benefits is a smart move. Once she has built up an emergency fund equivalent to three or six months’ typical expenditure, Anna-Marie might consider creating a longer-term savings fund or even investing in an Isa.”
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