Articles - Decisions, decisions…

The design of the UK pension system is such that retirement income is heavily dependent on earnings during working life. Those who earn the most and save the longest are likely to have the best retirements. The problem is that not everyone is able to work full time for all of their working lives. For many there are fundamental life choices which impact on their ability to do so - such as staying in education and having families.

 By Fiona Tait, Technical Director, Intelligent Pensions

 Research by Wellbeing, Health, Retirement and the Lifecourse (WHERL) project looks at how different life choices effect earnings capability and assesses their impact on retirement outcomes. Based on the results it is possible to identify groups who remain largely outside the pension system and to consider what can be done to improve their prospects in later life.

 The research, led by the Institute of Gerontology at King’s College London and made available in a report from the Pensions Policy Institute (PPI), showed that:

 • Men are (still) most likely to work full time for most of their lives.

 • Only 25% of women worked mostly full time up to age 54.

 • A new group of “late entry, early exit” labour market participants

 • About 10% of men and 21% of women were in paid employment after State Pension Age

 • “Unretirement” is becoming more common

 Gender and Health
 Gender and state of health are generally not lifestyle choices however there is no doubt that both factors impact considerably on retirement outcomes. Women are much less likely to have private pension savings at retirement, and individuals in poor health are affected by their inability to work long enough to generate significant savings.

 Since – for most people anyway – these factors cannot be altered by personal choice, the only options available to improve their situation are likely to come under the aegis of state benefits. It is possible however to identify some other key factors which are more the result of personal choice and to inform people of the impact they will have.

 Entering higher education
 It may seem a no-brainer that people with better qualifications are likely to get better paid jobs but the research shows this is not a short term effect. The fact is that even at much older ages those with a higher level of education seem to be better off.

 Women with higher education are more likely to be in full time employment than those with medium or basic education and we can also see that individuals who have experienced higher education are most likely to be in paid work at a later age, thus giving themselves a greater opportunity to save.

 The research also identifies a growing group who enter the workforce later as a result of staying in education longer, but who are still able to retire very early (age 49). For some this is followed by “unretirement” i.e. a return to the workforce after they have initially left paid employment, nearly half of whom have been in higher education. The fact that these individuals tend also to be in better health suggest these decisions are largely driven by choice rather than necessity and that career changes are likely to be a common feature in extended working lives.

 Having a family
 Female lifecourses are, unsurprisingly, highly dependent on the decisions they make around family, and the majority are likely to take a career break and/or spend periods in part-time employment.

 Analysing the effect on retirement incomes shows very clearly that a career break of almost any length will result in a poorer retirement outcome.

 It is also extremely difficult to build up pension savings during part-time working. A better outcome is achieved by taking a longer break but returning to work full-time; or by working more days in the week whilst part-time.

 Women are more financially vulnerable to the effect of divorce. Whilst many women are likely to experience lower income in later life this is particularly noticeable amongst widows and divorcees.

 Women who are divorced are more likely to work full-time, and there is a significant group amongst the “unretirees” who were not in paid work during the ages of 16 to 54. This suggests that both full-time and later working is often not a choice but driven by economic necessity. In a divorce it is extremely common for settlement to award the marital home to the wife leaving all or most of the pension benefits with the husband.

 Many of these issues are for the policy makers to consider, however there are some ways in which financial advice can help:
 • Provide realistic estimates of how long people must work in order to achieve the retirement income they need
 • Consider ways that retirement planning can be arranged for the family as a whole, not just the main wage-earner
 • Help divorcing parties to split the marital assets so that both current and future income needs are met as far as possible

 These decisions are at least, if not more, important than choosing the best performing investment funds.

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