Is this the retirement of the future?
First published 15 April 2019 • Updated 21 August 2019
As Japan contemplates a national pension age of 70 or 75, and the UK’s own state pension age continues to rise, workers everywhere face the prospect of delayed retirement. Meanwhile, many British workers fear their own pension savings will not be sufficient – so what’s the solution? Article by Nick Green.
Japan – home to one of the world’s oldest populations – is bracing itself for a steep rise in the national pension age. The nation’s ratio of retired to working people is the highest in the developed world, and Japanese are also among the most long-lived. The ageing workforce, combined with a reluctance to accept immigrant labour, has prompted Prime Minister Shinzo Abe to propose delaying Japan’s national pension age to 70 or even 75 (it is currently 65, like the UK state pension age).
The pension crisis hasn’t been helped by the Bank of Japan’s attempts to combat deflation, which has hit bond yields hard and caused pension savings to stagnate. In response, many Japanese people of retirement age and over are nevertheless continuing to work. Government data reveals that some 12 per cent of the workforce is aged 65 or over, while more than 50 per cent of the population is retired and dependent on the remainder for financial support.
Will the UK face Japan’s pension crisis?
Japan, though an extreme case, is not exceptional. Much of the developed world is facing a similar rise in its old-age dependency ratio (the balance between pensioners and working people). The UK’s state pension age is now entering a period of phased increases, which will see it reach 66 by October 2020 for both men and women. Further increases are on the cards for workers born later, which will see state pension age hit 67 by 2028 (affecting people born in the 1960s and 70s). The state pension age is being kept ‘under review’, so any increase in life expectancy may trigger further rises.
Brits worried about running out of money in retirement
Recent research by ING shows that people in the UK are getting anxious about how they will afford retirement. Responding in the ING International Survey, 58 per cent of Brits said they were worried about having enough money in retirement, and nearly a third (32 per cent) said they currently had no household savings. More than half (54 per cent) expected to have to keep working in some capacity after their official ‘retirement’ – perhaps by reducing their hours, working part time or earning money from odd jobs.
Private pension pots (including most workplace pensions) can now be accessed from age 55. However, few pots are large enough to last from age 55 until the end of a person’s life. UK life expectancy at age 65 is now 18 years for men and 21 years for women, so even starting 10 years later requires substantial savings. For example, taking £20,000 a year through a drawdown scheme for 18 years would require a pot of around £260,000 (assume a steady 4 per cent interest). To do this for 21 years would require even more (around £285,000). The problem is, typically women have far smaller private pension savings than men – though this may be about to change.
The pensions gender gap may be narrowing
According to the Chartered Insurance Institute, the average 65-year-old woman today has only around £35,800 in private pensions, compared to £179,000 for the average 65-year-old man. But recent trends among today’s savers suggest that the picture may be different by the time Millennials and Generation Z retire. ONS figures reveal that women aged 16 to 24 have about £3,900 in private pension savings already, while men average £3,000. By ages 25-34, women have pulled ahead even further to £14,400 compared to men’s £12,100. Pay inequality and child-raising is likely to level the gap in later years, but it’s an encouraging sign that women are taking the challenge of retirement saving – and the greater obstacles they face – very seriously indeed. Furthermore, savings made earlier on have a greater impact later in life, since they benefit from compound interest over a longer period.
A future of phased retirement
With the population becoming both more long-lived and more elderly overall, and the state pension age increasing, it seems likely that more and more people will work beyond age 65 – perhaps way beyond it. Then again, there is no reason why they shouldn’t, provided that health in later life shows similar improvements and physical old age arrives later. Already there is a growing trend for phased retirement, whereby workers reduce their days or hours, change to less stressful jobs, start their own businesses or take a serious of career breaks, while supplementing their income by starting to access their pensions in a limited way. Phasing one’s retirement may also be an effective a way to bridge the ‘limbo period’ before reaching state pension age. As the line between employment, self-employment and retirement becomes increasingly blurred, future generations may stop talking about a ‘retirement age’ altogether.
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