AE and retirement
27 November 2017
This article was featured in the December 2017/January 2018 issue of the magazine.
Malcom Booth, chief executive officer for the National Federation of Occupational Pensioners, discusses the challenges for society
Not so long ago, pensions and retirement were simple. You retired at 65, or 60 if you were a women, and received your state pension. If you were lucky you had a defined benefit (DB) pension paying a monthly amount or a defined contribution (DC) pension used to buy an annuity that paid a monthly amount. Sadly, there were those who were not so lucky and did not make additional provision for later life, relying solely on their state pension. How life has changed.
The age of AE
Automatic enrolment (AE) was launched in 2012 to provide workers who otherwise wouldn’t have a pension, with something more than just the state pension and to help reduce the reliance on it and pension benefit. The roll out started with large employers with great fanfare and to great success. However, now is the time for small- to medium-size enterprisescto get to grips with the intricacies of the process possibly without the same level of expertise in their organisations and therefore face additional costs associated with training or employing the skills of external advisors.
The Pensions Regulator has begun spot checks to ensure compliance with AE legislation, making AE a key task for everyone. Recent research published by Aegon indicates that employers are not encouraging ‘Millennials’ to save. The reality is that the current levels of contribution will not provide a pension large enough to maintain their level of life style. Although AE is an excellent first step, it must evolve to ensure contribution levels increase to a more realistic level.
Earlier this year, post the snap-election, the government announced the intention to accept the recommendation of John Cridland’s report to increase state pension age to 68 between 2037 and 2039. While the logic behind the recommendation is sound, telling employees they are going to have to work for longer and pay in more could demoralise those saving into pensions when personal budgets are already constrained. Educating employees about pensions and that saving now is what provides your income in retirement, which could be as long as the time in employment, is key.
Communications around AE is very much focused on the future generations and the pension they can expect when they retire. What this has led to is a lack of communication around the generation now approaching a traditional retirement age and how later life is looking for them. This generation face a new set of challenges that previous generations did not.
...‘sandwich’ generation need far more support and guidance than previous generations
The road to retirement
The improvements in healthcare and the resultant increased longevity has meant that not only are the aforementioned generation faced with the possibility of having to pay for their own care, they may support their parent’s care costs and their children’s studies and deposit for a home. It is a difficult situation that this ‘sandwich’ generation is facing – financial support needed by their parents and children alongside their own desire to extend their working life with a ‘portfolio career’ or to retire completely. The Cridland review has recommended employers should have a policy in place to support their workforce and the government to create statutory carers’ leave to recognise the challenges that elderly care creates.
The changes in pension regulations have added another dimension. As a result, retirement is a much more fluid environment.
Moving towards retirement
Following the introduction of freedom and choice, the simple retirement option of purchasing an annuity by those with DC pensions is no longer considered the norm. Those with DB pensions can now transfer to a DC scheme to take advantage of the new flexibility; but can expose those approaching this critical decision stage to scams designed to syphon away the savings or poor advice resulting in large unexpected tax bills and no survivor benefits.
All these challenges mean that the ‘sandwich’ generation need far more support and guidance than previous generations. As well as the basic need for sound financial planning, more fundamentally is how to move from full-time employment to full-time retirement; perhaps initially with a shorter working week or new career and then eventually retirement.
This new environment also presents challenges for employers in terms of succession planning and the progression of staff through the organisation while ensuring the skills and knowledge of their older workers are not lost. The Cridland Review has suggested a mid-life MOT [ministry of transport test] which would assist this process and encourage the older generation to be apprenticeship mentors or take up their own new apprenticeships.
The challenge for society as a whole, is to create a situation where the older generation’s contributions are both welcomed and recognised. The opportunities that are available and could be developed need to begin while the individual is still at work and a ‘glide path’ to a fulfilling later life developed.
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*content correct at time of publishing