Articles - Questioning assumptions around retirement


Never before has the nation’s working generations had such fundamentally different ideas of what retirement means. While, Baby Boomers (ages 54-69) ponder the new flexibility of pension pots heralded by the 2014 budget, generation Y (age 19-33) are beginning a savings journey in a vastly different environment where responsibility has shifted from government and employer to the individual. This is the pragmatic new era of the ‘living pension’.

 By Jinesh Patel, vice president of defined contribution, Redington
 
 Baby Boomers believed in the notion that if one worked diligently over many years, retirement was a deserved break. Generation X (34-53) began to change this idea, favouring a gradual slowdown or a more flexible mix of work and leisure. Now, Generation Y is questioning the assumption that retirement must follow work.
  
 This blurring of the lines in the relationship between work and retirement is also fortunate as the reality is many Baby Boomers had it much easier in terms of pension provision. The slow removal of final salary pensions in public and private sectors has meant Generation Y must now begin defined contribution pensions early and regularly if they are to receive a pension resembling anything like that of their parents. An awareness of this issue has increased due to reports such as the Age of Responsibility undertaken by Redington and a number of industry experts. Young people’s expectations for their retirement incomes are modest. They are also factoring in a work / life balance in at least some of their retirement.
  
 While many Baby Boomers have been resentful to defer their retirement income following changes in the state pension age, young people take a different view. Many feel that the traditional post-work retirement is a retirement from life. According to Barclays, 24% of Generation Y expect to run their own business or work for themselves, in retirement – and 62% want to gradually reduce their work responsibility as they move into retirement. Generations X and Y tend not to think of retirement as a horizon that once reached, changes life irrevocably. This is where the living pension comes in.
  
 Rather than an arbitrary figure, the living pension is a measure of projected retirement income that factors in ‘must have’ lifestyle elements such as travel, hobbies and entertainment. Barclays found in 2014, that a UK living pensions would mean an income of about £17,500 a year on average (£18,500 for Generation Y; £17,400 for Generation X; and £17,400 for Baby Boomers).
  
 The problem is there is a gap between the lifestyle people want as they get older and the lifestyle they are likely to be able to afford based on their current plans and actions. Successful pension planning means setting objectives and mapping out flightpaths to achieve goals. But unfortunately, the following barriers get in the way of setting out objectives and sticking to them.
  
 Don’t put off thinking about funding until later in life
 Immediate pressures, such as paying a mortgage and other debts often side-track savers from their retirement goals.
  
 However, the problem with this is the money saved earlier works harder thanks to the phenomenon of compound interest – essentially the interest paid on interest. It is not easy, but disciplined saving when you are younger pays rich dividends later in life. Even if it means cutting back on discretionary saving.
  
 Improve education
 People find it hard to set a personal income target and this is partly because they don’t really understand the long-term savings process. There is a major information gap that needs a collective industry response. Employers, providers and the government need to improve education on using defined contribution plans and other supplemental incomes to provide for future pension provision. As Roz Watson points out in the Age of Responsibility report: “It’s all very well offering a market-leading pension scheme, but if the employee doesn’t understand how it works or what they need to do to make the most from it, they’re less likely to join in, sign up and make the most of this opportunity to save for a more secure future.”
  
 Understand that auto enrolment is not a panacea
 Auto-enrolment is a step forward but the reality is this is more poverty prevention than a mechanism for creating a living pension. The 8% level in 2018 is also potentially dangerous as it may alienate savers who feel it is too high – this again, is an education challenge. There also needs to be more subtle behavioural ‘nudges’ alongside auto-enrolment to get young people saving.
  
 Make all pensions flexible & portable
 The working world has become more flexible in the last few decades, with employees regularly leaving companies to pursue new opportunities within the same industry. Allowing all pensions to be portable and flexible would make things far clearer for employees within defined contribution schemes.
  
 Understanding the building blocks of your long-term savings plan
 Cash ISAs, Stock and Shares ISAs, Help-to-Buy ISAs, SIPPs, defined contributions plans, the state pension. One of the key barriers to creating a successful pension plan is understanding the sheer volume of options and range of investment vehicles open to savers and how they can assist you in financial planning. A pension may be only part of the picture. Being able to put together the different building blocks of saving into a long-term plan with defined objectives is crucial. Barclays research has showed that Baby Boomers who didn’t appropriately increase their pensions contribution are now resigned to downsizing their homes – these savers did not understand the need to carefully consider all future streams of retirement income.
  

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