Living longer means saving longer: rethinking retirement in the age of longevity
People are living longer than ever before. Reaching your nineties is no longer unusual and a retirement lasting 25 or even 30 years is increasingly common.
The World Health Organization states that by 2030, one in six people will be aged 60 or older, with the proportion of the world’s population over 60 increasing to 22% by 2050.
As the average age of the UK population continues to increase, challenges and opportunities arise. In addition to health and care concerns, consideration also needs to be given to how we act and plan economically. According to the International Longevity Centre UK, under 60% of the population will be of working age by 2030, highlighting the need for all of us to review our approach to work, saving and planning for retirement throughout our lives.
Building a financial foundation for the future
As we live longer, we need to start understanding and managing our finances better from a young age to set us in good stead. Children can form lifelong money habits by the age of seven so introducing financial literacy as early as possible is vitally important.
There has been a step forward recently to improve financial education. Since September 2022, it has been an embedded aspect of the Curriculum for Wales within the mathematics and numeracy and health and wellbeing areas of learning. England is following suit, extending the provision of financial education to secondary school students and introducing a new statutory requirement to teach citizenship including financial literacy in primary schools from 2028.
Parents and guardians could also have a role to play in ensuring younger generations have a solid foundation ready for when they approach adulthood. The concept of ‘baby bonds’ has been under discussion, with some suggesting that these long-term investment accounts should be reintroduced over 15 years after they were abolished and replaced by Junior ISAs.
Known more commonly as child trust funds, the accounts were launched in 2005 by the UK Government to ensure that every child had savings held in trust until their 18th birthday and the opportunity to develop their financial skills through saving.
A flexible work landscape requires a flexible approach
When young people enter the world of work, it’s a very different landscape to the ones their parents and grandparents set foot in. As technological advancements continue to move at pace and transform industries, AI and automation will increasingly shape future careers. In addition to the subjects they studied at school, college or university, graduates will need to excel as strong communicators and IT specialists to thrive in the modern workplace.
In addition to digital progression, the concept of how people work and when they retire has also changed. While some employees will still follow the more traditional model of full-time work followed by retirement, newer types of contracts and a more flexible approach to work, particularly following the pandemic, will see others spread their work across their professional life. This could be because of reducing hours or taking career breaks at different stages of life to prioritise pivotal life moments: travelling, raising a family and caring for older relatives.
With no forced retirement age, there’s more flexibility for people to choose when to enter retirement and draw their pension. Although the State Pension Age is due to increase, most workplace pensions can be accessed from your mid-50s. Thanks to increased life expectancy, it is suggested that people will spend roughly 30% of their lives in retirement, compared to 20% in the 1960s.
Encouraging saving and spending for a comfortable retirement
If people are now spending almost a third of their lives in retirement, how do we ensure that they are building a financial foundation from a young age and saving enough for their future?
When the Pensions Commission was revived last year, its return was accompanied by some stark statistics. The government’s analysis suggested that people retiring in 2050 would be worse off than pensioners today and that nearly 15 million people are under-saving for retirement, heavily skewed towards women, lower earners, some ethnic minorities and the self-employed.
There is particular concern that Generation X (individuals born between 1965 and 1989) is at risk of falling short in terms of their savings as this demographic rapidly approaches retirement age. Sandwiched between Baby Boomers and Millennials, this group may have less robust savings to enable them to live comfortably through retirement. Research by Get Britain Pension Ready last year found that 65% of Generation X said they no longer had access to defined benefit pension schemes and 30% said that auto-enrolment was not introduced in time to make a ‘significant’ difference to their savings.
The self-employed are another group who are at risk of not saving enough, especially as they currently sit outside the scope of auto-enrolment and aren’t required to save for a pension. There is also a real concern that a lot of self-employed individuals may find themselves working well beyond the usual retirement age, often in roles that are physically demanding and increasingly difficult as they get older. Without proactive pension savings, the risk of financial hardship in later years is significant.
A possible solution for this group would be to build pension saving into the self-assessment tax process. When completing their tax returns, self-employed individuals could be required to direct a portion of their earnings into a retirement savings product, with the option to opt out if they choose. Participation could be encouraged and supported by enhanced tax reliefs, making it more attractive for them to start saving for their future.
However, challenges persist even in groups who have saved enough to enjoy a comfortable retirement. Many retirees feel compelled to spend less and hold onto savings, including significant sums, in case they need to cover care costs in later life. A definitive social care policy could alleviate the concerns of retirees and stimulate more spending.
It’s clear that preparing for retirement requires a lifelong approach. From building financial confidence and understanding at an early age to making informed decisions about retirement during your career, every stage of life presents an opportunity to improve our future.
Stuart Price, Partner and Actuary