Baby Boomers – is it really the ‘Boom’ generation?
At the end of World War Two the first wave of post-war babies were conceived and reached the age of 65 in 2011. The Local Government Association forecast in 2010, that over 650,000 people would turn 65 in 2011 and that this figure would rise in 2012, to over 800,000.
This is nearly 100,000 more than the total number of babies forecast to be born in England and Wales in 2012. The increase in number of 65 year olds in Britain include those born in the latter half of 1946 and the first half of 1947, corresponding with the post-war spike in births – the ‘baby boomers’.
Now 65 year olds can expect to live another 23 years – until their late 80s – as they are living healthier, longer lives.
According to the Department of Work and Pensions (DWP), in 1946 and the first half of 1947, 65 year olds could expect to live for only a further 13 years. Now the DWP tells us that there are more people aged over 60 than under 16; that ‘baby boomers’ have added an extra £2 billion to the bill for basic state pension; and that within the 10 local authority areas with the greatest number of older people, for every two people of working age, there is one person in retirement. By 2030, this could increase to four people working for every three retired in these council areas.
It has been commented that the ‘baby boomers’ are part of a golden generation, many of whom have been fortunate enough to reap benefits that younger generations will not – enjoying record house price inflation, company pension schemes and free education for themselves and their families, and with the prospect of living for nearly twice as long in retirement as the 65 year olds who were celebrating VE Day at the end of the war.
Despite this potential wealth, some 65 year olds are facing many years in poverty. Research conducted by think tank Oxford Economics and the ONS reveals that 23% of pensioners, around 2.5 million people, now officially live out an impoverished retirement.
The longer post retirement lifespan presents many challenges across the generations. With more people aged over 60 than there are under 16, there will be fewer young people to meet the costs of the elderly through direct taxation.
The Government is working hard to find solutions for this significant shift in demographics by introducing legislation to end the default age for retirement and extending the pensionable age for men and women.
Baby boomers now retiring are at risk of having their dreams for retirement shattered because of pension shortfalls, low returns on their investments and savings and ongoing responsibilities for children and parents. Having been ‘baby boomers’, and in order to gain a life that will still ‘boom and bloom’ in retirement, most 65 year olds now need to plan carefully how they will occupy their time, whilst maximising and maintaining their income to provide for all that they hoped for in their golden years!
From the US, findings in a ‘New Retirement Survey’ from Merrill-Lynch (ML), indicate that many baby boomers (those people of around 65 years, conceived and born in the immediate post World War 2 years) and who are defined as affluent, plan to keep working and earning money during their retirement years. Planned alternate periods of work and leisure indicate significant changes from the tradition of pursuing a retirement of well-earned leisure.
The Merrill Lynch survey findings may prompt similar conclusions in the UK, as both nations have the affluent baby-boomer experience in similar circumstances, so what are the key conclusions we in the UK should take note of?
As a result of living longer, baby boomers plan to be “younger” longer and to work longer. Most baby boomers who responded to the US survey (65%) will stop working for pay and retire in the traditional sense at some point. However, that phase is more likely to begin in the late 60′s than at age 60. While 76% of baby boomers intend to keep working and earning in retirement, on average they expect to “retire” from their current work at around age 64, and then launch into an entirely new job or career.
When asked about their ideal work arrangement in retirement, the most common choices among baby boomers in the US survey would be to:
- Repeatedly “cycle” between periods of work and leisure (42%)
- Have part-time work (16%)
- Start their own business (13%)
- Work full time (6%)
Furthermore, only 17% of the baby boomers in the survey reported that they hope to never work for pay again!
It doesn’t appear, however, to be about the money. While 37% of the baby boomers in the US survey indicate that continued earnings is a very important part of the reason they intend to keep working, 67% assert that continued mental stimulation and challenge is what will motivate them to stay in the game.
The unpredictable cost of illness and healthcare is by far the US baby boomers’ biggest fear. They are three times more worried about a major illness (48%), their ability to pay for healthcare (53%) or winding up in a nursing home (48%) than about dying (17%).
US baby boomer men are looking forward to working less, relaxing more and spending more time with their spouse. Baby boomer women, however, view the dual liberations of empty nesting and retirement as providing new opportunities for career development, community involvement and continued personal growth.
Accumulating the resources, affluent baby boomers list the need for retirement freedom (81%), rather than age (56%) or any other variable as the most decisive factor for when they choose to retire. Recognizing the growing uncertainty of the future economy and government provision, baby boomers who have a plan and feel prepared, are twice as optimistic and far less fearful compared with those who do not.
So do we in the UK echo the US findings in our aspirations and intentions?
Living longer, working longer?
State pension changes are not the only way to combat the financial problems associated with increasing longevity. Recent legislative changes also include the removal of the default retirement age of 65. In theory, this means people can continue to work for as long as they need to. While this goes some way to solving the problem, it may not be an option for everyone.
Many people will have to leave work early due to “either ill health or the inability for elderly workers to retain their jobs”, says Partnership’s Head of Corporate Affairs, Jim Boyd. “People involved in manual work will be at most risk as the rigours of hard manual work and shift work take their toll and the possibility that employers may not be able to offer them suitable alternative employment.”
While a proportion of people will drop out of the workforce, we will also see an increasing number of people working beyond age 65. Some will continue to work because they want to, but others will do it because they have to. What more can be done to sweeten the bitter pill of a longer working life?
The International Longevity Centre UK (ILCUK) recommends government could consider graduating the state pension (starting it at a lower level and gradually increasing it) or promote existing opportunities more widely, such as deferring the state pension. Research carried out by the ILCUK with Aviva found half of those (55%) polled would support a system where individuals could access part of their state pension early, in return for a lower pension when they retire in full.
But monetary inducements from the government are not enough to support the massive shift towards increased working lives. If people are working longer then employers will need to ensure roles are appropriate for an ageing workforce to combat the issues Boyd mentioned earlier. Chief executive at ILCUK, Baroness Greengross, says innovative working holds the key: “A target based work pattern is one way of incentivising older people, so they have certain tasks they’re asked to do and it’s more flexible as to how they do them.”
In addition, she expects older workers to have a greater say in the design of their jobs. But she adds: “You can’t necessarily do the same tasks. You can’t necessarily go up scaffolding in your 70s, for example. There are management and mentoring jobs. What we’ve tended to do is put people in a job and when they’ve reached 50, they stop being trained for another job. Employers need to go on retraining people so they can go on working in appropriate ways.”
Expecting to live longer? Then start saving!
A well-documented fact is that many people are unprepared for supporting themselves in retirement for many years. As estimates of life expectancy are currently increasing year-on-year, more people are finding themselves financially unprepared and insecure as retirement age approaches.
It will be interesting to see how the retirement industry, as well as employers and the general public, respond to increasing longevity over the coming decades. Giving people time to prepare is crucial. Ten years is probably a minimal time-frame in which to make a difference. Five years is too short a period for people to plan for retirement, either in terms of their readiness and a positive mind-set, or through ensuring better financial provision after finishing work – already in wind-down mode and if unprepared, already playing ‘catch-up’.
The current situation for those approaching retirement within the ten year preparation period is also complicated by changes, wrought by a Government in a global recession, seeking an affordable welfare state. The national ‘goalpost shifting’, as in the recent budget, creates uncertainty for people approaching retirement. Inside a five year winding down period, negative changes to pension prospects and the cost of living in retirement may well further influence people to give up trying to make adequate provision for themselves.
Encouraging people to save earlier for their retirement is essential. There is a growing body of opinion that future public policy is likely to compel people to put more money into a pension pot. Saving earlier in life by choice, despite economic uncertainties, puts people in a better position to face the likely future challenges of living longer with less public funding support.
Encouraging people to save for their future – the pension pot or nest-egg strategy, is also made difficult by an economic culture that encourages us to spend more for economic growth and national success. We are encouraged to spend our way out of recession and part of our economic plight is that most savings look to have negative equity in the context of inflation! As savers we have to be very trusting and willing to playing the long game. ‘Be prepared’ must be the essential motto in saving for retirement.
Increasing life expectancy – a growing issue
At the last count, in 2010, there are an estimated 10,000 female centenarians in the UK, according to the Office of National Statistics. This figure is projected to reach 71,000 by 2035. Put into context, over forty years ago in 1961, there were only around 500 women who had reached their hundredth birthday.
The ONS say on average, a man aged 65 will live to the age of 83, a 65-year-old woman to 85. But what does this mean in terms of financial planning?
The International Monetary Fund’s (IMF) recent Global Financial Stability report warns developed countries including the UK could see public spending double to maintain the living standards of the elderly, by 2050. If people lived just three years longer than expected by this date, these costs could increase by half again.
The Chancellor’s Budget announcement that the state pension age will be automatically reviewed to keep up with increases in longevity is a sign that government are well aware of this growing trend. But making predictions about life expectancy is becoming a thorny issue – there doesn’t seem to be a standard approach to forecasting how long people will live. The IMF has warned that population forecasts have been underestimated so any measures in place are in real need of a shake-up.
Life expectancy can be informed by many factors such as where people live, their economic wellbeing, life styles and living standards, making any accurate and reliable estimate of increasing longevity, complex and difficult.
Some research even suggests that a review should be every five to seven years, to keep up with increases. Any increase in state pension age due to an increase in life expectancy, should be balanced against labour market movements and the availability of work for people at extended ages – a collaborative approach to estimating is needed.
Estimates from the government actuary department saying these are our projected actuarial increases, need to be adjusted – balanced with views from the health and care perspective, and from the business community.
The pensions industry is sitting on a wealth of knowledge, policy makers could use – It will be interesting to see what happens next.
A Pension Pot Reduction Scam
A report highlighting that growing numbers of pension savers are being offered the chance to release cash from their pension pot early – only to be hit with hefty hidden charges – was recently published by The Pensions Regulator, the Financial Services Authority and HM Revenue and Customs.
Described by an FSA spokesperson as likely to be a scam – where illegitimate businesses try to con individuals out of their pension money – the authorities have taken the unusual step of issuing a joint warning to demonstrate the seriousness of a problem they say affects thousands every year.
Last year, about £200million was taken out via these so-called ‘pension liberation’ schemes. Some firms offer to release part or all of a worker’s pension pot at a younger age in return for a percentage of the total. Those who are tempted into doing so, possibly to pay off a mortgage or fund their children’s education, are later hit with tax bills that can leave them with just a fraction of their original fund left. Most fraudsters fail to tell their victims that they will incur massive penalties from HMRC for accessing their pension early.
An example was given of a 50-year-old man building up a pension pot worth £20,000, and a firm may offer to give him £16,000 and take £4,000 in commission after ‘liberating’ his savings. However, hidden taxes and unauthorised payment charges to HMRC could lead to a bill of 55 per cent of the original fund. The victim could have to pay another £11,000, so that in reality he receives just £5,000 of his original £20,000 fund.
Pensions Minister Steve Webb said: ‘I am very concerned that people will end up poorer in retirement as a result of these dodgy deals. I hope people listen to these new warnings and think twice before making a decision they could later regret.’
Difficult Choices – ISAs or Pension Savings?
In the UK, we may be putting more savings into stocks and shares ISAs than into personal pensions.
Reporting on savings trends in the 2010/2011 tax year, the Office for National Statistics (ONS) said savers put £14.3bn into personal pensions in that tax year, compared with £15.8bn into stocks and shares ISAs. This compares with the £12.5bn invested in stocks and shares ISAs and £14.4bn in personal pensions in the previous tax year. It was the first time this had happened since 2001/2002.
Comments from across the pensions and savings sector suggest that there are a number of factors contributing to the imbalance. Most frequently mentioned is that ISAs are more simple and understandable to a saver, when pension saving appears to be subject to far more complex rules and arrangements.
Choosing and arranging a stocks and shares ISA for their savings may be seen to be much easier by the saver and not so much ‘set in stone’ as a pension savings arrangement. This latter point may be particularly significant in the light of evidence that some savers invest in ISA plans early in the tax year but may withdraw funds later in the year. This compares with pension savings which cannot be touched for years – for example not before age 55.
Savers accept the risks attached to savings when choosing stocks and shares ISA packages, where over time they are subject to the economic uncertainties of fluctuations in the stock market, the value of commodities and general uncertainties in the worldwide economies.
With pension savings there are now the additional perceived risks of political uncertainties to prey upon savers minds. People become concerned that Government will tinker with the rules before they are able to draw on the benefits of any long-term pension savings plan.
Before the 2012 Budget there was speculation that the Chancellor would axe pension tax relief altogether for higher rate taxpayers or cut pension contribution limits. Following the Budget, top earning pension savers have at least another year to get full pension tax relief on their contributions, but this situation is not helped by the Chancellor and rumours that there might be ‘tax raids’ on higher earners in future years. Despite saying that tax relief is an important incentive for investors and encourages long-term saving, he has already effectively cut the maximum possible tax relief for the highest earners, from 50% to 45% in April 2013. Despite assurances from politicians, other potential pension savers on lower incomes may not see their long term pension savings as being assured!
If the Government wants pension saving to be successful it must sustain and guarantee a consistent set of rules and build confidence that the product will not be the target of continuous government attacks.
The evidence of ISA product purchasing is that people like simplicity and consistency and year-on-year if the economic situation changes, they are not locked in without being able to change their savings choices.
The sad experience of many private and public sector employees over the last decade or more has been to see their own pension pots decline and in some cases disappear – together with much of the trust in providers and Government.
