By: STEVE RODGERS
Pensioners today have greater wealth, better health and increased life expectancy than any previous generation. There is a new world of opportunity for today’s pensioners but also significant challenges that need to be addressed.
Often my clients of “a certain age” will underestimate their life expectancy, thinking in terms of their own parent’s typical lifespan. Getting these clients to be optimistic about their own life expectancy is often a challenge.
Based on government forecasts, 63 per cent of today’s 65-year-old men will still be alive at the age of 85. As expected, this percentage is even higher for women and more than half of women aged 65 will survive to be over 90.
The research also goes on to suggest that one in 10 of all people reaching retirement age today will go on to celebrate their 100th birthday!
It is important that we adapt to these startling facts of life (and death!) as the longer we live the more capital and income we require in retirement to see us through.
Inflation is an obvious danger – inflation of just 4.5 per cent per annum will halve the value of a fixed income every 15 years, a period far shorter than the average retirement.
Furthermore, because we are also healthier, we will be more active in retirement. These activities; sport, holidays, hobbies etc all come at an expense.
In an attempt to stem the increase in cost of providing state pensions, governments are pushing up the state retirement age and people’s hopes for an early retirement are being dashed for all but the wealthy.
For younger readers, I think the message must be that it is more important than ever to start saving for your retirement as early as possible. However, when you are 20 or 30 something, it can be very difficult to see further than the next round of drinks, new car or holiday!
Nevertheless, the writing is on the wall and a happy retirement will require some planning and sacrifice.
For those readers who are either about to retire or already retired, there are some important matters to consider.
If you are retiring on an inflation proofed final salary pension, such as a local government scheme, you may have less to worry about. However, most private pension schemes often provide income in retirement by using the fund accumulated to purchase an annuity.
An annuity is where an insurance company provides you with a guaranteed income for life in return for a lump sum (your pension fund).
What is becoming clear is that the “one-size-fits-all” solution of buying a life-time annuity at the point of retirement is becoming less suited to the growing number of people with this type of pension scheme.
The problem with an annuity is that once you have bought it, it is totally inflexible and unable to adapt to suit your changing circumstances. This wasn’t such a problem for previous generations but with longer life expectancy it is unrealistic to expect your income requirements not to alter in retirement.
New innovative annuity products are being launched which may help future generations, but there is already available an alternative to buying an annuity. This is known as income withdrawal. What happens in essence is that you take your income directly from your pension fund which can remain fully invested in the type of investments that can offer a hedge against inflation.
One of the main attractions is that the amount of income can be adjusted each year to suit your changing circumstances. Of course there are limits; income can be anything from zero to about 20 per cent more than what would have been available through a level annuity. It is sensible to limit the amount taken in the early years to allow the fund to grow. This will provide greater scope for increases in income in latter years. The maximum limit is recalculated every five years.
Another big advantage is that if you were to die before the age of 75, the whole remaining fund can be used to provide a dependent with continuing income or, if preferred, a lump sum. In comparison, an annuity can provide a dependent’s pension, but only at a cost to your own annuity income, and there is no lump sum option on death.
Retired people should also look closely at any non-pension capital they have. For previous generations the normal approach to capital investments at retirement would be to consider mainly income products with very low risk to capital.
Typically, this would be predominantly in government gilts and deposit accounts. However, with increased life expectancy, it is appropriate to view these investments in a longer time-frame. If the investment is to offer any sort of hedge against inflation, it will be necessary to consider other forms of investment which are likely to include equities, property and commodities.
Well managed investment portfolios of this type have consistently over history provided growth well in excess of inflation.
Sure, there will be times like now when such investments will suffer due to uncertainties in the world’s economies. BUT the biggest uncertainty is “how long are we going to live?” You need to plan now to make sure your money doesn’t run out before you do!
For those who are retired with their own home but with little pension or capital, modern Equity Release schemes can offer a way of unlocking the capital built up in their property. This can then be used to provide additional income to help with the cost of retirement.
No matter what age you are, now is the right time to look at your options. Discuss your retirement with an independent and qualified adviser to make sure you enjoy your retirement to the full.
Please contact Steve Rodgers of Blacktower Group for further information.
Call 289 355 686 or email [email protected]