Retirement Age: A New Role for Advisers in Retirement Planning

31 Jan 2023

I recently combed through the Department for Work and Pensions’ (DWP) second state pension age review report again, which is due to publish its conclusions this spring. The paper’s grasp on the demographic changes happening across the UK population is impressive.

Rising State Pension Age

Suffice to say, over a third of the entire working age population of the UK will be pensioners by 2047. The result of this ageing is that the burden of triple-locked state pension provision on HM Treasury is rising pretty fast. Managing the gap between the age we leave the workforce and when we receive our first state pension payment could be the biggest issue in financial advice in the coming year.

The state pension and other benefits being paid to UK pensioners already amounts to 4.8% of the UK’s GDP and that percentage is set to rise to 6.2% of UK GDP by 2049/50. It seems certain that, as longevity continues to rise, albeit at a slower rate on recent estimates, the state pension age will be ratcheted up (if not now, then later) in order to temper growing pressure on the public purse.

This leads us to the natural conclusion that many more will need to be working deeper into what used to be called ‘old age’, especially as we also know more people will be dependent on the state pension to assure a modest retirement income. That said, the same DWP report notes that rates of unemployment and inactivity among 50-to-64-year-olds actually increased during the pandemic. Average retirement age currently sits at age 65.1 for men and 64 for women.

Managing a potentially increasing gap between the age we leave the workforce and the age we are able to receive our first state pension payment could become the biggest issue in financial advice in the coming years.

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It seems clear to me there is a large and important societal, as well as financial wellbeing, role for workplace advisers, as they will need to start advising their working clients not only on their decumulation options in retirement but also on when they should retire.

After all, older workers have many more employment rights and legal protections than they used to. So, if they want to work on, they should (in most cases) be allowed to do so. And if they want to go part-time, again the employer is duty bound to at least consider and explore these requests, regardless of the age of the employee.

Nevertheless, workplace advisers will undoubtedly be seeing an increasing number of clients with modest defined contribution (DC) pots who are still determined to retire before their state pension age. They will need to help these people to bridge a potentially widening gap between the age they want to leave full-time work and their state pension age.

This is an interesting challenge for advisers because it suggests the need to consider products like fixed term annuities to bridge this gap. After all, it’s fairly easy to work out a person’s retirement income expectation, calculate the anticipated shortfall and then source the best possible annuity to carry them through to their state pension age.

Clients retiring early today may have a particularly large gap to fill if they still have a residual entitlement to some second state pension over and above the new state pension (£185.15 per week in 2022/23).

If they have a sizable DC pot, they will need to focus on optimising their retirement income, increasingly exploring blended part-drawdown, part-annuity decumulation options which are now available in the DC market. Advisers can help find the right blend of decumulation options which balance risk free income with growth assets.

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