Articles - Cutting your retirement cloth to fit your pension

Our local tailor has decided to retire. Not something which is usually newsworthy. However, Tarcisio is 88 years old. And he is still not ready to give up work. When interviewed for local TV news, he describes how his “heart is crying” at the thought of giving up work and although his mind is still young, he does not have the strength anymore. Tarcisio is not the only older worker who wants to carry on working.

 By Dale Critchley, Workplace Policy Manager, Aviva

 My barber, Vincenzo, started his business in 1967 and is still working one day a week. He has had some of the same customers for over 40 years and coming to work means catching up with old friends as well as providing a great service.

 Clearly, Tarcisio and Vincenzo love their work.

 Working into our 80’s might not appeal to everyone. However, working for longer and transitioning into part-time work is increasingly common. For some, like Tarcisio and Vincenzo, going into work is something they look forward to. For others, not having enough savings means working for longer is a necessity. Auto enrolment is helping employees today save into a pension, but it has only been in place for 10 years, which means there are thousands of workers in their 40’s and 50’s with only a decade’s’ worth of pension savings. Therefore, the traditional cliff-edge retirement around 65 years old might not be an affordable option for this group, unless they act now.

 The seemingly obvious thing to do is to save more into a pension but the cost-of-living squeeze means this might not be a viable option for some, at least not for now. For those people who are struggling to put money aside for the future, financial education can fill a gap to help ensure they are making informed choices to maximise their savings. Saving into a cash ISA or a bank account might be the right thing for some people who want easy access to their money, particularly right now, but it is rarely the right choice for long-term savings. Financial education can equip employees with the knowledge to recognise the tax advantages of pension saving and the potential greater long-term returns of investing.

 Working for longer has three advantages when it comes to pension saving.
 Firstly, it provides savers with more time to save, meaning more employee and employer contributions are paid in. If someone has contributed pension savings for 120 pay days, adding another 36 pay days by retiring three years later will make a big difference.

 Secondly, it provides more time for existing funds to potentially grow in value. Traditionally, default funds de-risked towards retirement into a mixture of so-called ‘safer’ cash and bonds in anticipation of an annuity purchase. De-risking now tends to include assets designed to deliver growth during decumulation. The important lesson is that individuals who plan to delay their retirement should let their pension scheme know, so that de-risking is aligned with actual retirement age, and individuals maximise their opportunity for growth and returns.

 The third and final advantage is that the term over which income will be taken from a pension will be reduced. This will be reflected in the sustainable drawdown rate, as well as in annuity rates. At 80 years old, a £100,000 pension pot could provide a single life annuity of £10,975 guaranteed for 5 years for someone in good health, and someone with health conditions could receive a higher amount.

 The increase in value offered by an annuity as people get older is why Aviva is developing a hybrid ‘guided retirement’ solution which will initially be offered to Aviva Master Trust members. It will combine a flexible drawdown income in the early years of retirement with an annuity in later life, to manage the risk of running out of money.

 Another consideration is that the state pension will not be payable until age 67 from April 2028 and may increase further in time.

 Financial necessity and the love of work could mean more people retiring later. In turn, it means that employers and trustees need to ensure their workplace pensions schemes are fit for purpose. Flexibility is key to allowing individuals access to hybrid income made up of flexible pension withdrawals alongside a part-time income. It means employers benefit from years of experience that can be passed on to those coming through the business, and individuals can transition to retirement, perhaps at a gentler pace, and still enjoy working.

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