Retirement has changed and policymakers need to catch up

A recent survey (1), released at the start of the week, confirmed something we have known for a long time – more than half of the population would prefer to retire gradually, rather than coming to a full stop on particular day. A good proportion of the working population would prefer to change career or industries with the aim of winding down in anticipation of retirement.

We regularly speak to people who, having been successful in high pressure jobs, are nervous about adapting to a full stop retirement, and often worried about the impact on their physical and mental health. This concern seems to be shared by their partners too.

75% of those working in a phased-down position or a transitional career expressed satisfaction with their current employment, according to the survey.

Investment markets now have a more significant impact on the timing of retirement; whilst many of the current cohort of retirees have some final salary type pensions, giving them a secure income in retirement in addition to their state pensions, it’s rare to encounter recent retirees who are not at least partially reliant on investments (inside or outside of a pension) to provide for their income in retirement.

Until the start of 2020, markets had been pretty kind to retirees for more than decade, and the strong growth experienced was enough to mean that some people could afford to retire sooner than they had hoped. However, since then, markets have become less predictable and more volatile, and it seems likely that this trend will continue. As a result, being able to have some control over how and when you retire is particularly helpful. The next generation of retirees will have even less guaranteed income than current pensioners, so this will become more of an issue as time goes by.

Even those who can rely on a secure income in retirement from final salary pensions are being forced to retire gradually – for example, many NHS workers now have two separate retirement dates, which can be more than seven years apart, and have to work out what they do about the interim period.

Added to this is that the changes which have been made to pensions often mean that investment linked pensions are the last savings vehicle which people should draw on in retirement (it’s usually more tax efficient to draw down on other investments, like ISAs, first, as pension funds are particularly tax-efficient when you die).

It’s clear that some changes to retirement policy are needed, in order to take account of the changes to the way that retirement is taking place, and the way in which people would prefer to move into retirement.  Retirement policy mostly assumes that people will retire on a particular date, but this is an increasingly rare phenomenon, and it doesn’t appear to be what many people want.

Whilst the state pension has changed (your state pension age is just the age you become entitled to Old Age Pension; you can defer it for as long as you like), the messaging around the state pension hasn’t changed, focussing on state pension age and the amount you might get. A more flexible approach, and different messaging might help people to achieve better outcomes.

Pension companies continue to focus on the “full stop” retirement, asking us for a “selected retirement date” when we set up a plan, and often nudging investors into funds which are designed to provide pension benefits at that full stop date. Their communications also focus on this selected retirement date, despite these companies now offering much more flexible benefits.

Many of these companies would argue that they are obliged to follow the rules made by their regulator, and this is true. The regulator does seem to have been slow to notice the changes in retirees’ behaviour; it is carrying out a review of retirement income advice, which we welcome, but it relates only to advice about pensions – not other ways of funding your retirement, such as ISAs or other investments. The concern here is that the regulator may improve the outcomes for clients using their pensions for retirement income, but it may not help those who are using ISAs and other investments.

Our approach is to continue to help people with their retirement plans. That means having an open mind about how people might choose to retire, helping them to understand the potential financial pros and cons of their actions, and passing on some non-financial wisdom about the options, garnered from years of helping people making the transition from full-time work, then helping them to make their plans a reality.

(1) Principle Group’s Wellbeing Index

Philip Wise |

Managing Director and Chartered Financial Planner

This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The value of investments may go down as well as up and you may get back less than you invest.
The favourable tax treatment of ISAs may be subject to changes in legislation in the future.
A pension is a long-term investment, the value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
The Financial Conduct Authority does not regulate some aspects of Trust, Tax and Estate Planning.

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