Only 1 in 6 Baby Boomers aged 54-71 know what their retirement income level is likely to be with any accuracy, 42% of 54-59 year olds cannot approximate retirement income2 October 2017
Semi-retirement trend rising, with 19% of 66-71-year olds still in paid work, finds new Dunstan Thomas-commissioned nationwide study
One in five (19%) of 66-71-year olds in the UK are still working full- or part-time today to supplement their retirement incomes. The 19% that are still working is made up of 8% of pensioners who are completing 30-hours or more of paid work each week, while 11% are working part-time (up to 29 hours) per week for money.
Looking across all 54-71-year-old Baby Boomers who are not yet retired (59% of all people captured in the nationwide study), over half (56%) predicted working full- or part-time to supplement their retirement income beyond the State Pension Age (SPA) of 65 years.*
The findings shine a light on the blurring of the lines between work and retirement and beg the question: when are most of us really going to retire in the traditional sense? So, what does the new reality of semi-retirement look like for the majority that are already embracing or anticipating it? Of the majority of non-retirees that predicted working part- or full-time to supplement their retirement income, the average length of semi-retirement was four years and two months. A third of men (32%) and 17% of women predicted they would be in semi-retirement for up to five years. One in every seven men (14%) and nearly as many women (12%) predicted they would never stop paid work ever!
The findings of the Dunstan Thomas-commissioned nationwide study indicate that falling retirement savings levels, increasing life expectancy and changing working patterns are already significantly impacting people’s retirement plans.
Adrian Boulding, Director of Retirement Strategy of Dunstan Thomas, commented:
“A key aspect of the new Pension Freedoms is that you don’t need to start taking all your pension at the same time, opening up the opportunity to blend part-time earnings with some pension income.”
Baby Boomer retirement income averages £23,376 - 40% less than average final salaries
Baby Boomers’ overall pre-tax income in retirement from state and personal pensions and other investment sources is set to be an average of £23,376, across the 54-71-year old age group captured by the study. Older baby boomers aged 66-71 averaged retirement income of a healthy £25,323; while 60-65 years olds predicted an average of £24,089; and 54-59-year olds, presumably those most affected by the decline in Defined Benefit (DB) final salary pension penetration, predicted average retirement incomes of £20,486 per annum.
2017’s average salaries of people that have worked for more than 20-years are now £38,719 (Source: PayScale), so retirement income predictions indicate an average fall in income in retirement of £15,343 per year or 40%. The retirement income of 54-59-year olds is expected to be about half average final salaries.
Only 17% of Baby Boomers can predict their retirement income
More than four in 10 (42%) 54-59-year old, pre-retirement Baby Boomers can’t even approximate their future retirement income and, sadly, 31% of all Boomers have never actively financially planned for their retirement even though a third of them are already over 65. Only one in six Baby Boomers (17%) know exactly what retirement income to expect when they retire.
The oldest tranche of Baby Boomers (66-71 years) which Dunstan Thomas researched, are three times more likely to have an accurate picture of their retirement income than 54-59-year old tranche (36% and 11% respectively), although by their age it may be too late to do anything other than keep working or downsize to fix any significant income shortfalls.
Housing equity needs to be added to retirement income estimates
Some of the reason why Baby Boomers do not have an accurate view of their likely retirement income is that a substantial minority are now anticipating using equity in their home to supplement any retirement income shortfalls (see the TISA Old Mutual Wealth ‘Can housing wealth save the day?’ Report on this, dated 24th November 2016).
The TISA report cites the lack of access to information, specialist financial advice and life-time mortgage products to enable conversion of equity into annuity income, as the key barriers to helping people to make an accurate assessments of what they can expect from equity release, despite the fact that many have decided that they will be at least partially-reliant on property equity to fund their retirement.
Third of Baby Boomers plan to downsize, 1 in 7 to release home equity to supplement retirement income
Confirming this, the Dunstan Thomas Baby Boomer Retirement Planning Study found that nearly a third (29%) of all 1,002 54-71-year olds questioned, were likely to or had already downsized their home to supplement their retirement income; while 14% were likely to or had already released equity from their home.
20% turn to regulated adviser for retirement planning, nearly as many to use guidance services
Nearly half (47%) of Baby Boomers have done nothing or plan to do nothing at all to gain more knowledge about pensions pre-retirement and only 20% of Baby Boomers have sought, or plan to seek, face to face regulated financial advice.
Perhaps more encouragingly for the Government, nearly as many - 17% - have sought or will seek financial guidance from the likes of Money Advice Service, The Pensions Advisory Service or Pension Wise. A quarter are still relying on reading the financial pages of the nationals for guidance in this area which is a problem because the regular money pages of the nationals have been steadily reduced in both quality and number in recent years as paid-for readership and revenue figures have fallen away in the digital age.
Financial advisers specialising in Inheritance Tax Planning (IHT) may be alarmed to hear that over half (54%) of our sample have no intention of going to an adviser for IHT-related financial advice. That said, 12% were planning to use an adviser for this purpose and overall 17% of the sample had already used a regulated financial adviser to give them more confidence that they were making the right financial decisions.
Other key reasons Boomers have used advisers include: to gain the security of a professional opinion (16%) or simply because they did not want to make weighty financial decisions alone (8%). Two-thirds (66%) had never consulted a regulated financial adviser. A separate question identified that 36% of the sample could not differentiate between regulated advice and guidance and only 17% (presumably the ones that have used an adviser) claim to fully understand the difference.
The really positive news is that those taking regulated financial advice, stand to have total pre-tax household retirement income which is 39% higher than those who have made all their retirement income provisioning decisions alone. So, if you go to a regulated financial adviser you can hope for, on average £33,577.45 total retirement household income. But if you don’t, you take a hit of £13,204.05 to reduce retirement household income to £20,373.40 – what better endorsement for financial advice can there possibly be?!
Adrian Boulding of Dunstan Thomas added:
“Whilst it is inevitable that those that go to an adviser for assistance have more savings to manage in the first place, it’s worth noting that financial advisers instil the financial disciplines of saving, planning and reviewing progress which helps build long-term savings.”
29% of Boomers still don’t understand Pension Freedoms choices
When asked how soon before retirement they would consider reviewing their pension-held investment/assets to reflect DC pension decumulation choices (listed as encashment, purchasing an annuity or some form of income drawdown), nearly a third (29%) of Baby Boomers simply didn’t understand the options that are now open to them from age 55 under new Pension Freedoms rules.
One in 10 are leaving the asset selection decision-making entirely to their provider with a view to buying an annuity from them; while 19% are planning to look at adjusting their portfolio 12-months before decumulation, which may well be too late. Just 7% planned to review asset and risk exposure levels at least five years before beginning drawing their pension.
Providers missing opportunity to help as retirement plans change
Despite clear changes in planned retirement ages, more than half (51%) have not informed their product providers of changes in retirement age, with 49% not receiving prompts to provide updates from their provider. Planned retirement age is a key determinant of both how much savers will need to put in each year to reach retirement income goals, and asset selection in the period immediately before retirement.
Only 9% of providers invited Baby Boomers that were approaching retirement to update their predicted retirement age; while 11% of customers informed their insurer without being prompted to do so.
These findings indicate that providers and fund managers need to work harder to communicate the value of planning asset allocation well ahead of decumulation. Fund managers may also need to design more funds for holding through the SPA and well beyond.
Wake-up pack needs to go digital
The pensions wake-up pack has taken a great deal of criticism of late, but it is still responsible for prompting one in 10 (11%) Baby Boomers into actively planning for retirement, the survey found. The regulator’s rule on the wake-up pack used to be that it should be sent out four to six months before planned retirement date, or when a customer requested a retirement quotation. However, our findings suggest that prescriptive rules like this no longer serve the customer well. For example, of those who received a wake-up pack, we found 11% of wake-up packs were simply arriving too late to help customers – they’d already had to make retirement decumulation decisions by the time the pack arrived.
Adrian Boulding again:
“There is a real opportunity here for some providers to show leadership in establishing pre-retirement digital communications before the regulator forces smarter digital communications standards on the industry. Indeed, if they move early, any best practice which they establish may will help to shape inevitable regulation in the future.”
Pensions Dashboard could offer retirement planning panacea for nearly half of Baby Boomers
Dunstan Thomas’ survey also sought reaction to the idea of the Pensions Dashboard which is due to be delivered by 2019. One in five Baby Boomers (22%) said they would use the Dashboard to assess whether “I’ve got enough in my pension pots to hit my retirement income target”. Nearly as many (20%) were already in decumulation mode and wanted to work out: “How much I can draw monthly out of my income drawdown plan from my pension without running out of money too quickly”. A smaller group (15%) wanted to use it to run comparisons between different decumulation options – cashing it in and putting it into an interest-bearing bank account, selecting an income drawdown or annuity scheme. Others (13%) wanted to use it to: “work out how much I need to set aside for an adequate long-term care pot”.
Adrian Boulding of Dunstan Thomas again:
“These findings confirm our view that consumers will not take kindly to a Dashboard that does not support post-retirement decumulation decision-making as well as pre-retirement accumulation and at-retirement decision-making. The line between pre- and post-retirement is irreversibly blurred and dashboards must reflect this.”
Instant mobile ‘retirement income health’ alerts favoured
There was a generally positive reaction to the idea of being sent instant alerts to their mobile if changes happen which might affect their pension pot in some way. For example, if a new tax policy change is likely to impact their retirement pot 60% of Baby Boomer respondents with a mobile and private pension plan want to be alerted of that instantly. 47% want to be alerted if their portfolio has become unbalanced (i.e. overweight in a specific risky asset type); while 45% liked the idea of being alerted instantly if an asset has gone up or down by 10% in a given quarter.
Dunstan Thomas will publish its full report of findings from this study later this month.
*State Pension Age for women is 64-years old in 2017. Parity with male SPA is not reached until 2018.
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