Recent changes to state pension age, and the removal of the default retirement age, means people are now free to work for as long as they want or need. Previously, women would receive their state pension at age 60 and men at 65. Now, anyone aged under 41 won’t receive it until they are 68.
But if someone is planning to retire later and fails to notify their pension provider, there can be serious consequences in terms of retirement income.
Aviva’s analysis shows that an average earner in an automatic enrolment scheme could miss out on more than £40001 in their pension pot by sticking with a default retirement age of 65 when they actually intend to retire at 68. But anyone whose retirement age is still set at 60 could miss out on almost £10,000. This is a situation that is more likely to affect women, due to the way default retirement ages were set in the past.
This outcome can occur because every default investment solution has a de-risking element. This means that as savers get closer to their retirement date, investments are switched from higher risk (higher return) funds, to lower risk (lower return) funds, to protect their retirement savings from sudden market moves.
If a provider holds a retirement age that is too young, they will move investments to less risky assets too early. This means people lose out on investment growth when their pension pot is the largest.
If they hold a retirement age that is too old, they will keep the money invested in riskier investments for too long. If investments lose value too close to the planned retirement age there may not be time for them to recover their value.
This means less money, or perhaps a last-minute delay to retirement plans.
With 47% of all workers saving into defined contribution pensions2, and around 90% of those invested in default funds, this issue could affect a significant number of people.
The difference in returns can be wide. In Aviva’s ‘My Future’ default solution, the five-year return for investments3, at 31st March 2019, was 3.2% higher 30 years from retirement, and 1.1% higher five years from retirement, compared to the return at retirement age. Whilst past performance is not a guide to the future, this shows the general effect of gradually moving to lower risk investments in the approach to retirement. This is fairly typical of defaults generally, although the difference may be larger in defaults that invest more aggressively, where potential losses could be greater.
Employers typically set the default retirement age for all their employees when they first set up their workplace pension. Members can then contact their provider and set their own retirement date.
Colin Williams, Managing Director of Workplace Savings & Retirement, said: De-risking profiles have been carefully designed to balance risk and return in the approach to retirement. But this balance is thrown out of kilter if someone wants to retire at a different age than was originally assumed when they started their pension.
“Changing your retirement age is a really simple way to maximise the potential returns of your pension investments. Plus, it’s an opportunity to check how much is in your fund and if you’re on course to achieve the type of retirement you want.
“Many providers allow you to check and change your retirement age online. I’d encourage people to go online and check the retirement age their provider holds, and if doesn’t match their current plans, change it.”
1Loss for an individual earning £27,664 automatically enrolled at age 22 into an AE minimum scheme invested in Aviva’s My Future default fund, contributions assumed to increase annually at 2.5%, figures discounted for inflation at 2.5% p.a,
• Retirement age set to 68, life styling begins at 53 – Total fund value at 68 is £137,600
• Retirement age set to 65, life styling begins at 50 – Total fund value at 68 is £133,500
• Retirement age set to 60, life styling begins at 45 – Total fund value at 68 is £127,700
2Employee workplace pensions in the UK: 2018 provisional and 2017 revised results. Office for National Statistics
3Based on returns to 31st March 2019
• Returns at retirement – 5.7%
• Returns 5 years prior to retirement – 6.8%
• Returns 30 years prior to retirement – 8.9%
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