It’s great that people are living longer than ever before.
Boys born between 2015 and 2017 are expected to live 79.2 years, whilst girls can look forward to 82.9 years of life. Our average lifespan has increased by 1 to 2 years in the last decade, but compared to the start of the last century the difference is staggering. In 1901, boys were expected to live to 48.5 and girls 52.4. When state pensions were first introduced few people lived long enough to enjoy them.
As we all live longer, though, we are also having less children. Birth rates have continued to decrease, with 755,066 live births in 2017, a fall of 2.6% since 2016 and the lowest number of live births since 2006. The effect of these trends is a dramatic shift in the number of older people in our society. In 2017 the proportion of the UK population aged 65 or over was 18.2%, compared to 15.9% in 1997. This percentage is projected to grow to 24% by 2037. Government research has predicted that half of all adults in the UK will be over 50 years of age by the mid 2030's.
This change will have profound implications for future government spending, especially in the areas of healthcare and pensions, which already account for well over 40% of the total. Action has already been taken by previous governments to restrict the cost of pensions by increasing the state pension age, which currently stands at 65 and is increasing to 66 by 2020, to 67 between 2026 and 2028, and to 68 between 2044 and 2046.
A recent report from the Centre for Social Justice (CSJ) called for the state pension age to rise to 75 by 2035. The report suggests that this should only be implemented along with a package of measures aimed at improving health in the workplace, flexible working and training opportunities, and the Government has strenuously denied that it has any plans to adopt changes. Nevertheless, as future governments struggle to balance their budgets in the face of ever-increasing demands from an ageing electorate it seems clear that something further must be done.
The CSJ report details how the number of older people in the workplace has continued to rise. Between 1998 and 2018 the employment rate for both genders aged 50+ increased in every year, more so for women. For females aged 60–64 years old, the employment rate more than doubled in that time from 23.4% to 48.5%.
Alongside this, the average age of exit from work has increased. For men, the average age of exit from work has increased from 63.1 years old in 1998 to 65.1 years old in 2018. For women, the average age of exit from work has increased from 60.6 years old in 1998 to 63.9 years old in 2018. Furthermore, the employment rate of those aged 65 and older (above the current SPA) has more than doubled between 1998 and 2018, from 5.0 per cent to 10.6 per cent. So much for early retirement.
It seems inevitable that these proportions will continue to increase. For many people who remain in good health in older age, continuing to work provides stimulation, a friendship group and engagement with life that can be rewarding, as well as the additional financial security of continuing to earn a wage. For others, staying at work may be an economic necessity and the only way to maintain a reasonable lifestyle in the face of low pension values and limited savings.
Recent changes to pensions have opened up extra flexibilities in retirement planning, with the option to draw a pension whilst still working, or to continue paying in to older ages. However along with this flexibility has come a move towards personal responsibility for later life finances, with the need to understand how to manage pension funds or other investments and ensure that they continue to deliver a satisfactory income to what may be advanced ages. The decline of final salary pension schemes has increased the need for individuals to take responsibility for themselves.
For many people, taking early retirement is an important aspiration, and with good planning this is still eminently possible. However, as the starting age for state pension payments moves ever further into the distance, requiring personal funds to last significantly longer, people will become increasingly dependent on their savings if they are to achieve the freedom to decide when they retire.
If early retirement is one of your goals, the time to begin planning for it is now.
Andy Jervis, CFP