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Is Britain poised to enter a “golden era” of retirement, or have these days already passed? With people living longer compared to the 1970s and 80s, fewer private sector employers offering “gold plated” final salary pensions and a cap on the lifetime allowance (LTA) since 2010-11, it is easy to make the case for the latter. Yet, with careful planning, individuals can still prepare for a fulfilling and comfortable retirement in later life.
Below, we explore how British retirement has changed over the years, how “peak retirement” is not necessarily behind us and how savers can best prepare in the current landscape. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
The changing UK retirement landscape
Retirement looks quite different in the UK compared to just 3 or 4 decades ago. Millennials (i.e. those born between 1981 and 1996, or between ages 26 and 41 today) are the generation most likely to “job hop”, whilst older generations often stayed with one employer throughout their life. As a reward, it was more common for employers to offer a post-retirement “salary” (a final salary pension) to former workers. Today, UK organisations have less incentive to do this. Not only is it less affordable for non-taxpayer-funded employers (given higher average life expectancies since the 2000s), but greater job mobility means that workers have more responsibility to take pension pots “with them” – e.g. by consolidating into a single, private scheme.
Is “peak retirement” behind us?
Certainly, many retirement benefits previously (and currently) enjoyed by retirees are vanishing. In 2012, 12.8m people were entitled to a type of defined benefit pension in the private sector compared to 9.7m in 2022. The lifetime allowance – capping the total tax-free amount that can be saved across an individual’s pensions – has almost halved in nominal terms since 2011, and is currently frozen at £1,073,100 until 2026. Also, those looking to retire soon must contend with the cost of living crisis – adding pressure to build up a bigger pot to meet their goals.
However, there is still much to be positive about regarding UK retirement in 2023. Although the Normal Minimum Pension Age is rising to 57 in April 2028, people can still retire with a pension “pot” from age 55. Individuals enjoy greater freedoms compared to before the 2015 Pension Freedoms too. Previously, most people with a defined contribution pension were forced to buy an annuity. Whilst the decline in final salary pensions puts more responsibility on savers to look after their own pension investments, it also means retirees often have more control over where they can invest their money (e.g. in “ESG” investments which align with environmentally-friendly or socially responsible principles). Do not forget that a pension “pot” can also be inherited by a beneficiary without inheritance tax (IHT). A final salary pension, unless transferred to a defined contribution scheme, is more limited in this respect.
Ideas to prepare optimally for retirement in 2023
The State Pension, although under pressure for reform, is still a valuable source of income in retirement in 2023. The full new State Pension provides a guaranteed lifetime income for an individual in retirement, worth £185.15 per week in 2022-23 (£9,627.80 per year). Under the “triple lock” system, the income rises by at least 2.5% each financial year and is available to each UK taxpayer. A cohabiting couple, therefore, can combine two State Pension incomes to support their retirement lifestyle (e.g. £19,255.6 in 2022-23). Given that a couple is estimated to need £19,900 a year for a “minimal lifestyle” in 2023, it is certainly still possible for households to build a “comfortable” retirement even if the retirement landscape has changed.
It is important not just to rely on your State Pension, however. Most people will also need separate savings – e.g. in a workplace and/or personal pension. The earlier you start your own pension contributions, the more time you have for compound interest to build up your wealth. However, you need an appropriate investment strategy which suits your risk tolerance, goals and time horizon. Someone nearing retirement, for instance, may benefit from “de-risking” their portfolio (e.g. moving growth shares into bonds`) to avoid too much pension damage if there is suddenly a stock market crash. Younger investors, however, have more time for their portfolios to recover from “bear markets” and so could be less cautious with their asset allocation (if they are comfortable doing so, avoiding needless risks).
Making plans to keep future retirement expenses under control is also a good idea, helping to ensure the sustainability of your pension(s). For instance, owning your home outright – rather than renting in retirement – will likely require a smaller pot of savings. You might have lower outgoings in the form of child-related expenses and commuting costs. However, your lifestyle may also be higher in retirement – such as taking more holidays, or pursuing hobbies.
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Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk