Dunstan Thomas has published a consumer study that tells me what I knew from personal experience, that my generation – “the boomers”, don’t know much about retiring or retirement. Here is how it announces itself.
Exploring Baby Boomers’ Lengthening Journeys to Full Retirement
The title is a little confusing as “full retirement” is not properly defined. If it means a withdrawal from all activities that could be called “work”, then the journey is indeed getting longer, but most of us are hard pressed to tell whether we are retired or not!
Indeed the vast majority of the households surveyed still think of their chief income earner in terms of a current or former career. Only 13% of those surveyed say they are reliant on pensions or disability benefits. The link with work stretches way beyond the end of work, as many of those in the managerial sections consider themselves in terms of their jobs post 70 as before. Very few elderly people I know, define themselves as a pensioner and those that do – are living on the state pension. My theory is that those who are living off workplace pensions, see themselves in terms of the work that got them there and many of them are still doing that work. In short, we are not retired “in our heads”!
Actually , a staggering 71% of those in DT’s survey expect to work on beyond state pension age
I think it fair to say that the 1m over-50s leaving the workforce during and since the pandemic, are likely to be among the 71% seeing themselves “back at work” in their late sixties. Dunstan Thomas insist that those out of the workforce as a result of this “great resignation” are struggling to find work…
The fact that many want to work on but struggle to find suitable work, points to a clear need for the pensions industry to provide flexible retirement solutions, that can bridge gaps in employment for this age group.
But I’m not so sure. The Office for National Statistics said, unemployment edged up 0.1 percentage points in the second quarter of 2022, to 3.8 per cent. The number of job vacancies also dipped slightly, with almost 20,000 fewer openings in May-July than the previous three months. But there are still more than 1.27mn unfilled jobs.
I don’t think the great resignation was a result of people being kicked out of work , but from people who thought they had enough in reserve to take some time out and have some early retirement. This does not however mean that people have a long-term plan to leave work. That would mean them being confident they have an income that replaces work.
I think that people are more reliant on their own earning capacity and less confident in their savings to bail them out. The big number in this part of DT’s survey is at the bottom – 31% of those asked didn’t know what their DC savings were likely to give them as a replacement income later on.
There is very little in this chart that gives me confidence that people are confident in their pension savings as an income provider.
But people are confident that their workplace pension is a cash provider. Dunstan Thomas draw the same conclusion.
The flood of money we are seeing out of pensions and into bank accounts as tax free cash perhaps reflects the lack of confidence or understanding in pensions. Customers may be disadvantaged as the interest on bank deposits is so low. The pensions industry may have served the customer needs better had it retained their assets.
Anywhere but pensions
People have thought about it and do know what they want to do. Only 4% don’t know!
Where I differ from Dunstan Thomas is in the role of the financial services industry. DT see it as providing flexible products that can meet the needs of a semi-retired workforce while I wonder if people – were they to have proper pensions , wouldn’t plan their work around income shortfall.
Necessarily, the use of pensions to “gap-fill” requires some skilled cash-flow planning. That means talking to a financial planner or learning the skills for yourself.
Answers to a separate question uncovered the fact that 37 per cent of Boomers have used a financial adviser at some point in their lives, indicating that a much larger group of Boomers have already been convinced about the value of regulated advice in order to get a professional third party opinion on financial planning matters.
Third of Boomers plan to take financial advice to determine sustainable drawdown level
The difference between “planning to” and actually using financial planners isn’t explored but we know that in practice, the numbers using a financial adviser for both initial and ongoing advice is much lower. Dunstan Thomas find this “worrying”, but I find it easy to understand. Paying to find out that you haven’t got enough to do what you want to do, is a painful thing to do.
We know that adviser numbers are shrinking and that most advisers are looking to improve efficiency by using the 80/20 rule (where you ditch the 20% of your less profitable clients to maximise the value from the 80% who make you most money). The Consumer Duty may require this process to be less brutal, but the fact remains that most of the 37% of those expecting to get financial advice, may struggle to find a decent adviser.
All of which will be grist to Adrian Boulding’s mill. Adrian is exploring ways of converting DC pots to CDC pensions with the RSA (as well as contributing to this report). I am sure that Adrian is drawing the same conclusions as I am from what I’ve read.
People reaching retirement today are unclear how to retire and confused by the value of their savings in their process. They understand tax free cash but not the pension that they were told they were buying. They consequently plan to work on beyond state pension age, even if they aren’t working today.
Frankly, this does not suggest that for most boomers, retirement is a very meaningful concept. That really is an indictment of the pensions industry and one that we should seek to redress. Greater certainty of retirement income is needed, DC isn’t hacking it. Let’s hope that Adrian’s work comes to something.
I agree with most of the content in this blog. However I am not sure ithat the lack of retirement product solutions is down to lack of innovation in the pensions industry. Quantitative easing and very low long term interest rates combined with longer life expectancy have combined to make funding retirement more expensive. Human beings do not generally like the idea of giving all their savings to an insurance company in return for an inflexible income. So annuities have proved to be difficult to market. Most investment based annuities cannot be made attractive either. You cannot expect insurance companies to offer unsustainable rates. Look what happened to Equitable life when they tried to maintain falsely high bonuses in the face of worsening actual returns. Maybe CDC might offer better returns by offering smoothed income for life rather than individual drawdown. But we are not going to get innovation when the industry is operating under such difficult conditions. People want certainty and if they want certainty then straying from annuities involves risk. People aren’t necessarily being daft by working longer. If they want certainty of income at a level of lifestyle where they can enjoy retirement then the logical solution right now is to keep working for the certainty of a salary now. The UK economy is an unholy mess, far worse a mess than has been admitted. We have a Conservative government with the most incompetent, unprincipled thick as mince cabinet in modern parliamentary history, and almost certainly we are getting a new Prime Minister who plays to the crowd and is economically illiterate. I probably do have enough to retire on now but as I really enjoy my work and as I value financial security the logical step for me is to carry on working. I am sure many people have come to the same conclusion for themselves.
I think the clue to confusion is the application of the 80/20 rule.
It was clear in 1988 that the regulation would force the majority out of the advised marketplace as 20% of the clients produced 80% of the income
The result 80% have been discarded as cross subsidy was eliminated by well intentioned new rules.