In line with our risk management framework, today we published our Q4 2019 performance update.
Retirement and pensions: evolving with the times
The concept of retirement is one which many people believe is as old as the hills. Yet while there are glimmering traces of pensions being paid in the BC era (Augustus offered later-life funding to Roman soldiers), it is widely accepted that the pioneer of the pension was Otto von Bismarck. Better renowned for his military acumen, as German Chancellor he came up with the revolutionary idea of paying government pensions to disabled workers and older members of society back in 1881. The reason it was considered revolutionary was that, at the time, people simply did not retire.
In Britain, the state pension – then known as the ‘old age’ pension – was first introduced in 1908. Men over the age of 70 were entitled to five shillings a week (about £15 in today’s terms). However, given that average life expectancy at the time was just 47, this benefit was enjoyed by precious few.
Workplace pensions arguably date slightly further back to 1874, when injured nurses were given an annual payout of £15. For the next 60 years however, it remained a niche concept reserved for certain (male) manual and public-sector workers. Only since 1948 has the state pension become mandatory, and the workplace pension more common.
The future of work
The point of the above is that pensions, and even retirement, are both still brand new. And even in the brief history of retirement, pensions have evolved considerably. So, while many of us take for granted that we will retire at 65, and enjoy an average of 20 golden years without having to work, the reality is that there is limited precedent for this, and the future of retirement is a moving target. Rapid increases in life expectancy mean the costs of both the state pension and tax relief on workplace pensions are putting enormous strain on government budgets. And with the UK in particular still running up significant fiscal debt, something simply has to give.
In all likelihood, that will mean a sustained increase in the commonly-accepted retirement age, and already we are starting to see a shift. Nearly 15 per cent of men in our country over the age of 65, and roughly 8 per cent of women, are still in work. This trend is likely to continue, given the degree to which life expectancy has soared. In 2015, it had risen to 80 for men and 83 for women, while babies born after the year 2000 are predicted to have a 50 per cent chance of living until the age of 105. Only a lucky few will be equipped to fund a 40-year retirement, especially with the state pension age set to increase sooner than expected. The rest of us will simply have to work longer.
Will attitudes keep up?
A big question is whether attitudes of employers, and even colleagues, will keep pace with an ageing workforce. In the digital world we live in, many workers of an older disposition are assumed to be at a disadvantage, so any lingering prejudices will not help the cause of keeping them in work. According to a study by charity Age UK, around 65 per cent of older people believe that age-based discrimination is rife in the workplace. It also found that around 40 per cent of workers between the age of 35 and 50 get sufficient in-work training, whereas this figure drops to 18 per cent for over 50s.
In a fast-moving world, where career changes, by necessity, are more common, it is vital that the value which more experienced workers can bring to the table is not ignored. And with the inevitable lengthening of careers, there is greater scope for return on investment in older workers for employers to boot.
Savvy planning can save the day
While working for longer will be unavoidable, and perhaps slightly unpalatable, for many people, there is a way to maximise both the length of time and financial security of your retirement: shrewd saving. Courtesy of auto-enrolment, employees (and most contractors) are able to benefit from significant employer contributions towards a pension pot. If possible, it is certainly worth matching the maximum employer contribution, as this increases both your retirement saving and income tax relief.
Yet many experts believe consumers should look to save between 15-20 per cent of their annual income for retirement, so it is unlikely that a workplace pension alone will cover this (unless you contribute over and above this maximum employer contribution). As such, squirrelling money away for later life is essential.
But it isn’t just the amount you save which matters: it’s also the return you earn on this ring-fenced money. Easier said than done, given that inflation continues to increase, and interest rates remain stubbornly low. However, it has been a strong year for many who have invested in the stock market, while peer-to-peer lending offers inflation-beating returns with lower levels of risk. It is thus advisable to contemplate alternatives to grow your money before simply putting it in the bank and watching it erode in real terms.
An uncertain future
As we've alluded to above, pension laws are always subject to change, and for the Treasury, this saving mechanism presents a soft (and lucrative) target if the coffers need to be filled. And as long as interest rates and annuity rates remain low, those planning for retirement - and those already of retirement age - are likely to come under pressure.
Then again, the advent of technologies such as Artificial Intelligence and fintech could well bring immense wealth to the economy as a whole. We are also living longer, goods and services are getting cheaper, and quality of life has never been better. There is a lot to be cheerful about, and one shouldn't fall foul to the doom-mongers.
Nevertheless, the future of retirement, and what the norms will be in this respect over the next few decades is very uncertain. As such, it is essential that you keep one eye on the future, and start planning for retirement as early as possible so that your golden years can be filled with fun, relaxation and plenty of special memories with your loved ones.
Related articles:
•Drawdown fees: the price of pensions freedom
•UK house prices: Slow and steady wins the race
•What is the Financial Services Compensation Scheme?
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