A single picture from John Cridland’s Independent Review of the State Pension Age contains a very important message, believes Bob Champion, Later Life Academy chairman.
Pension experts maintain someone on average earnings should be aiming for a replacement income in retirement of two-thirds of their pre-retirement income. If they are in receipt of average earnings of £26,364 per annum when they retire, therefore, they should be aiming for a retirement income of £17,576 a year.
According to the picture reproduced above from page 54 of Cridland’s Review, however, if they are going to be in receipt of the average retirement income, consisting of State and Private Pensions, then they will be around £5,500 short of that target.
On low incomes such a shortfall is not going to mean a very happy retirement. The clichéd image of retirement being lived on the golf course, punctuated by regular cruises, is not for them. This despite having accumulated private pension savings worth around £80,000 during their working lives.
For illustration purposes a level annuity to close a shortfall in income of around £5,500 will cost a further £110,000.
The average retiree will therefore have the following choices:
- Struggle with their finances throughout their retirement; or
- Defer their retirement for many years; or
- Call on whatever other wealth they have to supplement their pensions.
For many, the first two options will not be palatable. Fortunately, 70% of those in retirement own their homes and 63% of property wealth – worth £2.5 trillion – is owned by those over the age of 55. Those who own their homes will be able to seek some relief by including some of that wealth in their retirement income plans.
We often hear stories of people being turned away by financial advisers at retirement because they do not have sufficient pension wealth. Around 700,000 reach the age of 65 each year. That means there are 700,000 potential customers looking for retirement income advice.
Half a million potential customers
OK – those who own no assets and are on means-tested benefits require specialist advice. Yet 70% of 700,000 is not far short of half a million potential customers each year looking for solutions as to how to move into retirement and how to optimise their retirement income. They are going to need help in identifying how best to use their pension savings in conjunction with their housing and other wealth.
Even those with more than adequate pension savings could be looking for solutions that enable them to preserve their pension wealth by drawing down on their housing wealth first for estate-planning reasons.
Millions of average people are in need of holistic advice on how to draw down their wealth in an efficient way from all their savings and investments, including their house, to obtain a decent retirement.
Although John Cridland was looking at the future of the state pension age, the evidence he used to support his recommendations may have confirmed that retirement income and planning involves a lot more than just considering pension savings. And, this is likely to be the same situation for many years to come.