By Dale Critchley, Workplace Policy Manager, Aviva
An annuity equivalent to the state pension and simply linked to the retail prices index would cost in the region of £225,000. The state pension forms the bedrock of many retirement plans, making giving up work affordable for some and making a valuable contribution to the incomes of many more.
While these changes have been signalled for a while it’s worthwhile considering what they mean for the retirement options offered by pension schemes.
Many people will have an aspiration to stop working earlier than age 67, for others, cutting down hours may become a necessity driven by changes in their health or the demands of their job. There is a significant difference in healthy life expectancy across the country, from the lowest in Blackpool at just 52.3 years’ old on average, to the highest in Wokingham where the average person remains healthy until age 70.2 years. Within every workforce there will be those for whom working full time right up until state pension age is no problem, while for others it’s simply not an option.
This is where the flexibility of defined contribution pension saving can be incredibly valuable. Being able to access part of a pension or set up a private pension income that reduces once state pension becomes payable is not only helpful for those who have a plan to retire in their 50’s or early 60’s. Flexibility can be a real help for those who find they need their pension income earlier, or who want to continue to work but work fewer hours, with an income top up from their pension. It can also be helpful for those who want to defer their pension and work past state pension age, enabling them to pay down debt for example, without taking a pension income that they have no need of.
As people age, differences between individuals tend to widen. Health outcomes diverge, levels of savings and other sources of income differ, family responsibilities, caring commitments and personal priorities also change over time. All of this means that retirement is less a single event and more a personal journey that may involve adjustments and unplanned decisions along the way.
Ideally, everyone would have access to some form of financial advice when they take their pension. The advent of targeted support may provide an opportunity to deliver valuable guidance at scale, helping people to better understand their options and make more informed decisions about their retirement income.
The government are looking to simplify things through the provision of default retirement solutions that are suitable for different cohorts of members.
For this intervention to be a success we will need to focus on both the design of the income solutions and the journey that takes savers to a solution that meets their needs. To succeed, it’s important to recognise the need for solutions that help savers have the income they want, when they want it, that deliver good value to all, and which consider people’s retirement needs and circumstances.
As state pension age rises, individual retirement income needs will inevitably become more diverse. Defined contribution pension schemes already have the capability to deliver the right solutions – the question is whether schemes fully embrace flexibility as a strength and design retirement income solutions that reflect the varied realities of working lives today and in the future.
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