Andy James, head of retirement planning, Towry:
"As part of its EU Labour Force Survey, European statistics firm Eurostat recently revealed that just under 20% of the British workforce aged between 65 and 69 were in employment in 2012. Along a similar line, research by Barings showed that 14% of non-retired individuals had no intention of retiring at any age. This figure has remained consistent with the company’s 2013 survey. Certainly in the long run I would expect both these figures to increase as the state retirement age rises and more people become aware of the time they are going to potentially spend in retirement.
This has implications for default funds in occupational pensions. Many of these are likely to be set up on a lifestyle approach which assumes that the scheme member will take 25% of the fund at the stated retirement age and purchase an annuity with the rest of the funds. The strategy with these types of investment is therefore to reduce risk over a period of years leading to the stated retirement age, thus ensuring that there are no unexpected shocks with investment falls near to retirement.
With the move to greater pension flexibility and the removal of the default retirement age for workers, the number of individuals retiring at a set age and then purchasing an annuity will reduce greatly. For many therefore, the default fund is likely to be unsuitable. This will provide a headache to scheme trustees, as they are required to ensure that default funds are suitable for the majority. But while they ponder these points it would be a sensible idea for everyone in their scheme’s default fund to have a good look at it to ensure it will prove suitable for their retirement plans.
On the point of pension flexibility, where the full availability of the whole pension in one lump sum is now only a little over six months away, it is interesting to take a look at the Australian experience where they have had this type of flexibility for around 20 years.
Interestingly, Australians are contemplating reversing the decision because of the financial problems many have experienced in exercising this freedom. An interim report in July by the Murray Review catalogues in detail some of the problems that Australians have caused themselves. It shows that many people with access to their retirement benefits lack the skills and financial awareness to understand how to turn a lump sum into income to support them through retirement.
The report finds that roughly half of Australian retirees take their pension as a lump sum, and of this group 44% will use the funds to pay down debt, fund house purchases or home improvements and a further 28% use their lump sum for car purchases or holidays. The result is that a quarter of retirees run out of money by age 70.
Hopefully the UK government’s promise of guidance for all retirees will assist in helping better decision-making, but I suspect that, like in Australia, we will still find that some will overspend in the early years leaving little for later life.
Certainly there will be a crucial need for proper cash flow planning in retirement and ongoing advice to ensure that any decisions that are made are carefully thought through, with long term sustainability a serious consideration."
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