01 April 2020

Henry Tapper, chief executive officer of AgeWage, discusses the choices people have when approaching retirement.

Though most feel retirement ready at this time of year, what does it mean to stop work? An alarming statistic released by the Centre for Economics and Business Research at a later life conference last week suggested that as many as half return to work months after hanging up their clogs.

Many of us may feel financially ready to walk away from work, only to find that it was work that gave meaning to our lives. Being ready to retire is not the same as being financially ready to retire. But I’m a pensions expert, not a life coach – so I’ll confine myself to the things that matter to people as they approach retirement.

Let’s start with the obvious target, the pension – or should I say ‘pensions’ as most people get to retirement today with six pots according to the Financial Conduct Authority’s (FCA’s) latest estimate. If you are still accruing (building up) rights to a guaranteed pension (defined benefit) then lucky you. But for the rest of us, getting retirement ready is about remembering, finding and organising our various pots into one big pot.

It’s very hard indeed and even if we get all our pots together, there’s likely to be technical problems with some which may have guarantees that could be lost if money is transferred. You need a pensions ‘Arthur Negus’ to spot the rare antiques in your car-boot sale of pension paperwork.
Most of us press on, calling insurance companies and trying to get sense out of call centres until finally we decide on one pot which we can call our pension. Then the fun really begins. The pension freedoms mean there are limitless choices about how we want our money paid to us. Each choice has different implications with regards tax and means-tested benefits.

To simplify things, the FCA has told pension providers to narrow choice to these four options:

  • take all the money in the next five years (cash out)
  • swap the pension for an annuity
  • keep the money invested
  • drawdown an income from the investment.

These choices are called ‘investment pathways’ and if your company’s workplace pension is a group personal pension then the FCA’s idea of ‘retirement ready’ is that you are on one of these pathways.

But, of course, that’s a very narrow view. For most of us, our retirement is going to be funded by a whole load of things and most of these have nothing to do with pensions at all.

Take inheritances; statistically, most people who get to 55 and ‘freedom-time’ will have one if not both parents alive. The inheritance is often the family home and that can have massive importance to everyone. Having been involved in the running of residential care homes I know what a gut-wrencher it is for families to lose that home to fees. For many people, being retirement ready may involve certainty about the inheritance and how to protect the wider family as parents gothrough extreme old age.

Another area that isn’t talked about much by pensions experts are benefits, principally pension and universal credits and all the component parts of the benefits system that are impacted by having money in pensions and pension income. Learning the way that pensions and benefits interact is a major undertaking, but for those on limited means it is probably the most important aspect of being retirement ready,

Then there’s property, and sometimes second properties. I’ve been saying to clients for decades that you can’t buy a sausage with a brick but that isn’t true anymore. Since insurance companies worked out that they can finance annuities from payments they receive on mortgages, the market for ‘equity release’ has gone through the roof. So long as you have your own property you can drawdown the equity as a capital sum or even turn your housing equity into a pension. In fact, taking money against their property is becoming commonplace for people to become retirement ready.

And, finally, there is everything else from the business you built up to the money you’ve been squirrelling away in individual savings accounts. It includes your savings and your investments. Each has a place in the retirement plan that says you are retirement ready.
Knowing your worth and the wage you can pay yourself in retirement is only part of the picture. The other part is your understanding of yourself and your capacity to enjoy what some people call ‘the longest holiday of your life’.

This article was featured in the April issue of Professional in Payroll, Pensions and Reward magazine and was correct at the time of publication.