Official statistics from HMRC in July 2018 show that flexible payments taken from pensions have exceeded 500,000 for the second quarter in a row*. In quarter 2 of 2018 over 570,000 payments were made to over 260,000 people totalling in excess of £2.2 billion.
Yet according to research undertaken for Retirement Advantage in April 2018, the most important factor that over 50s were looking for was certainty of income. Flexibility came in at just 28%, which was down on the previous year’s research. So does this signify a change in the behaviours of those heading for retirement? It’s hard to tell. Certainly the statistics from HMRC don’t echo any downward trends, but perhaps it’s also too soon to say.
Flexible access to pensions for those aged 55 and over has been allowed since April 2015, but doesn’t provide any certainty of a future level of income. Prior to the pension freedoms, the most common method of providing a secure income in retirement was via the purchase of an annuity. Annuity purchase is no longer compulsory with your retirement savings, but based on the statistics, people still seem to seek out the key factor that annuities offer. Annuities are still available of course, but rates and the income from them have continued to deteriorate, putting many off.
In an article released by the Office for National Statistics (ONS) on 13 August, they explored how the population in the UK is changing**. In 2016, there were 11.8 million UK residents aged 65 years and over, which represented 18% of the total population. Compare this to just 25 years earlier with 9.1 million representing 15.8% of the population.
Fast forward 25 years to 2041 and those aged in their 50s now (the baby boomers) will have moved into older age and by 2066, it’s projected that there will be 20.4 million UK residents aged 65 over. This group would represent 26% of the total population, which is broadly equivalent to the population of London today.
With this number of people and the growth expected, you can see why the Government has concerns over the state pension scheme and the sustainability of this in the future.
The ONS figures also demonstrate that the fastest increase will be seen in the group aged 85 years and over. In mid-2016, there were 1.6 million people in this group, representing just 2% of the total population, but projected forward to mid-2041 the figure is expected to double to 3.2 million and by 2066 to treble. By this point, there will be 5.1 million people aged 85 years and over making up 7% of the total UK population.
For the over 85s the state pension will need to be paid for 20 years and in many cases for much longer, but at £8,000 (in today’s terms), this on its own is unlikely to be enough for many people to live off. Even if the triple lock on pensions remains in place and the payment increases to say, £10,000, this will barely be keeping up with the rising cost of living.
Those who take advantage of the flexibilities available to their pension savings now (the baby boomers mentioned earlier), must therefore rely on the payments withdrawn (on the assumption they aren’t working) before their state pension entitlement commences in their late 60s. Additionally, whatever they have managed to retain on top of their state pension will potentially need to sustain an income in retirement for another twenty or more years.
The assumptions are all based on a good state of health, but what happens if you have health problems or need long term care? These factors can have a significant impact on your retirement savings but by how much is hard to say. Inflation risk and investment risk will also have parts to play depending on where your retirement funds are held.
Unfortunately, there is no such thing as no risk, as foregoing investment risk means you have to contend with inflation risk – you just need to be clear about which risk is worth taking.
Seeking financial advice from a professional can help you to prioritise what’s actually important to you and plan for the type of retirement you desire. Leaving these things to chance could mean that you can’t enjoy retirement as you wished you could – going on holiday, starting new hobbies and having the money to do the things you want to do. Worse still, you could run out of money too soon.
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