Article by Phil
Advisers understand only too well that retirement planning advice is affected by many factors. One of which is life expectancy.
Figures from the Office for National Statistics (ONS) for example, show that the number of people living to over 100 has doubled in the last twenty years. In 2003 there were around 8,000 people over 100, now the number is over 16,000. The number of over 90-year-olds is also increasing rapidly, with over 600,000 pensioners now over 90. This increasingly ageing population is putting pressure on pensions. Not just the state pension, but private pensions as well.
Retirement planning advisors are having to factor in people living longer and making their money last longer.
Putting it in perspective Mike Ambert of Standard Life explained that “there are 300 months between your 65th birthday and your 90th”. That’s a long retirement. Longer than some people, often in the public sector, actually work!
Although the state pension age is set to rise to 70 in the future it’s not certain that people will be able to work that long. According to Phoenix Insights, whilst nearly 80% of workers think that they can work until they are 60, less than 50% think that they could still be doing their job at 70. This is likely to cause problems in the future. Especially as we know that millions of workers do not have enough saved to finance their retirements.
It’s already the case that only 33% of people are fully retired at 65. 20 years ago, over 75% were retired at that age.
Cost of living increases
Of those who are retired, many are having to cut back on their spending. 40% of over 50’s have said that they are spending less on luxuries like meals out and takeaways. Others are cutting back on hobbies like gym memberships and sports activities.
75% said that their energy costs had risen, 60% said that their shopping bill had gone up and almost 50% said their fuel and transport costs had risen. The cost of living is therefore another important factor to take into account when your retirement planning advice is being considered.
Tax relief
Another factor in retirement planning advice is the amount of tax you will pay in retirement. Making sure your savings are tax efficient will make a big difference.
For example, the value of tax relief on cash ISAs has risen from £70 million in 2022 to a massive £2.1 billion in 2024 according to HMRC. In terms of stocks and shares ISA’s the amount of tax relief has increased from £2.8 billion in 2018 to £5.6 billion in 2024. Together over £7 billion in tax relief is being paid to ISA savers by the government.
But, the government has capped the maximum ISA deposit allowance at £20,000 until 2030. This will mean that savers see less tax relief as inflation eats into the value of their savings.
More and more people are being caught in the tax trap because the tax allowances are not changing. For example, in 2010 236,000 people paid the higher rate of tax at 45 pence. Now 1.1 million taxpayers pay the higher rate of tax.
Fund Performance
The performance of investment funds is obviously important when considering which provider to use for a retirement planning solution. However, it is surprising how many people don’t understand or consider fund performance. According to The Savings and Investment Alliance (TISA) over 80% of investors never look at their fund performance. The main reasons are a lack of understanding about the way in which performance is measured, and the financial language used.
There’s also consideration of whether an actively managed fund is needed or whether passive fund management is the right option. A J Bell has reported that based on its analysis of fund performance over the last 10 years only one third of active funds did better than their passive alternatives.
Property Wealth
Retirement Planning is not always about pensions and investments of course. Property wealth can be an important factor. With over £3 trillion in property values held by the over 65’s, property represents almost 40% of average wealth. There are ways that this can support retirement plans by talking to your financial advisor.
So why are people still not engaging in retirement planning advice?
Given the importance of retirement planning as we’ve seen from all the current evidence around pension shortfalls, why do people still not deal with their retirement plans?
Is it because they don’t want to argue about their plans? That’s the case according to Columbia Threadneedle who found that:
- 30% of couples said that discussions about savings and investments created arguments.
- This rose to 45% for the under 35’s.
- Women were much more likely to want to discuss retirement plans, but overall, 45% of couples said that it was the “last thing they wanted to talk about”.
- 25% of couples said that they would speak to an adviser about their plans, which isn’t exactly encouraging.
Please don’t put off your plans, it’s too important to ignore. Especially considering that 7 million pension pots have been accessed since April 2015.
Don’t just listen to us, Aviva found that:
- 25% of over 50’s said that they should have taken their pensions more seriously
- A further 20% said that they wished that they had put more into their pensions
- And 20% said they should have made a retirement plan
- 35% of people between 60 and 65 have no pension savings
- 45% of people said that they would need to work past the state retirement age in order to be able to pay their bills.
All good reasons to take retirement planning advice sooner rather than later.
Annuities
Prior to 2015 over 75% of pensions were accessed through an annuity purchase. That figure is now down to 10%. Although this is growing again with improved annuity rates more recently. But 60% of pensions were accessed through a drawdown mechanism last year. One which really would benefit from professional retirement planning advice.
In terms of annuities, people still tend to stick with their pension provider rather than shopping around for a better deal. Currently less than 15% switch their annuity provider. Even though they could get better returns elsewhere. Canada Life found that:
- 15% of people just weren’t confident enough to switch.
- 25% said that they just wouldn’t know how to switch.
- 40% would switch if it lowered their charges.
- 60% would like guaranteed income from their annuity.
- 55% wanted to be able to make withdrawals as well.
All of these could be delivered by taking professional retirement planning advice.
