To some people retirement means being a youthful 70-something with a wonderfully fulfilled life spending sun-soaked and carefree years strolling along idyllic beaches or playing golf. Wining and dining nightly at the best restaurant, all while maintaining the youthful physique of a healthy 30-year-old.
But this is surely a modern myth dreamed up by marketing people. Maybe some people do end up leading such lives, but I doubt many do or would even want to.
To many people the reality of retirement is likely to be more about coping with the chronic pressures of everyday life that never go away, but simply change over time.
Pressure relating to money and finances; pressure relating to children struggling with their own circumstances and worries; pressure relating to their grandchildren and their health and wellbeing; and, for many, pressure supporting their ageing parents as they reach their final years.
And financial pressures don’t magically evaporate the day you stop work and start drawing your pension.
Regular income
Retirement is, and always has been, about income streams. When we are young it is fairly easy in our society to sell our time in return for a regular income.
One retirement strategy some people follow is to carry on selling their time and effort as they age by simply carrying on working. There is much to be said for that, but not everybody is able to physically carry out working tasks as they reach old age, so it is not possible for everyone to expect to do that.
People reaching their late 60s these days receive regular income from the state in the form of a state pension. That is an income stream most of us can rely on, but the realities of government finances mean it is more like a trickle than a stream. Worth having, but barely enough to live on.
The single most useful income stream working-age people can engineer for their older selves is a pension. By putting serious amounts of money aside while they are working people can ensure they will likely be more able to cope with the financial pressures that will confront them in their post-working years.
A pension scheme operated and contributed to by employers is demonstrably the best way to instil the discipline necessary to both encourage and help people regularly defer income in favour of long-term savings. That’s why the recent auto-enrolment reforms were, and are, so important.
Steve Bee is director at OpenMoney Benefits
Well I think Steve must mix in the wrong circles. I will be 75 in October. I still do a (very) little work, I play tennis (when not in lockdown) twice a week. I have a gym at home that is used at least 3 times a week (I can still do 30 continuous press ups and I guess I’m fitter than most). Yes, we usually go on at least 3 holidays a year, but this year will be an exception! I don’t think that makes us unique or unusual by any means.
Yes, a pension is worth having – but not exclusively. OK if you have an employer that contributes and you are not trapped in awful AE. As far as own contributions are concerned, if at all possible, just to knock out higher rate tax. Not a lot of point in just getting basic rate relief, as this is just borrowed money (after your PCLS). And for many the tax on the benefit is likely to be higher than the basic relief on contributions.
ISAs and Investment Bonds are key. Income can be taken entirely tax free in ISAs and deferred 20 years for bonds provided you don’t take more than 5% of the initial investment. (Until the chancellor starts to tax these too). It isn’t only how big your income is in retirement; it is also how little tax you have to pay relative to that income. All pension income is taxed, so do you really want to lose 40% if you can avoid it? And of course, if you are foolish enough to go into drawdown (unless there is a very good reason to do so) then indeed your money worries will increase. If you have bonds and ISAs you already have these worries, at least an annuity avoids having even more.
It is not matter how much (or how little) you have to live on in retirement (or semi-retirement) money is always a worry. Particularly in today’s environment. Will dividends decrease? Will taxes rise? Will we have inflation? Will we have to pay more for energy to subsidise the green initiatives? And so on. You don’t even have to be retired to have these concerns!
Were it not for the government’s incessant and prejudicial tinkering and meddling with the pensions framework, a lot more people would have considerably more confidence in committing money to a RPS.
Prudential has done useful work that demonstrates the steadily increasing number of people likely to breach the LTA which, of course, is a deterrent.
What was the rationale for scrapping Contributions Protection Insurance (WoP)?
What was the rationale for scrapping life insurance cover via a RPS (subject to maintaining a reasonable level of ongoing contributions to retirement benefits)?
What is the rationale for imposing a limit on input levels in addition to the LTA?
What is the rationale for the incredibly complicated TAA in addition to the capped annual input allowance as well as the LTA? It simply isn’t either fair or necessary.
And the rules governing AE/workplace schemes are nowhere near as clear and/or as simple as they could and should be. 95% of all AE’d members probably don’t have a clue what they are. The government should have just instructed employers that they must put in place a scheme but that it could be one of their own choosing, with advice costs on top of the proscribed rates of input from each party. Why did it need to be any more complicated than that?