Could You Afford to Live to 100?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham.
Did you know that the first state pension was launched in Europe in the late 1800s, by Otto von Bismark? Cleverly (or deviously), he set the age for collecting it at 70. Given that most Germans lived to around 40 at the time, probably fewer than 1-2% actually saw a penny of it.
The situation today, of course, is far different. Many of us can expect to live well into our 80s or 90s. The UK average life expectancy is now 83.2 for women (79.6 for men), whilst the Office for National Statistics estimates there are around 13,170 centenarians currently spread across the country. This figure is likely to nearly quadruple by 2035.
Whilst the prospect of living longer presents many wonderful opportunities (particularly more time with our loved ones), it does pose some significant financial challenges. In 1908 when the State Pension was first brought in, the government estimated that it needed to provide an income to an individual for about 9 years. By October 2020, the State Pension age is set to be 66 for men and women, who are both now expected to live far longer.
In other words, our pensions potentially need to last twice as long as they did over 100 years ago. In this short guide, our Grantham-based financial advisers here at Castlegate will be sharing some ideas to help provide a sustainable income throughout such a long retirement. We hope you find this content helpful, and invite you to get in touch if you’d like to arrange a consultation with us regarding your own financial plan (at our expense):
Option 1: building your fund early
There is wide recognition amongst policymakers that young people in particular (i.e. 18-30 year-olds) are not saving enough towards retirement. This was partly the reason behind the government’s introduction of auto-enrolment in 2012, which requires employers to include their staff in a workplace pension. In 2019-20, your employer must contribute at least 3% of your salary to this scheme, whilst your own contribution must be a minimum of 5%.
This might sound like a considerable sum, but it’s important to put this into perspective through an illustrative example. The median full-time salary in the UK is £36,611, and 8% of this amount represents about £2,928.88 per year (i.e. around £244 per month). Suppose, for simplicity, that you saved this figure each year for 25 years and the fund grew by 5% per year (after fees). At the end of this period, your fund could have grown to as much as £143,501.49.
Whilst this is certainly better than not saving at all, it’s important to recognise that this is unlikely to allow most people to sustain a comfortable retirement over 30+ years. In 2019, research suggested that retired couples need at least £18,000 per year to cover essentials, and as much as £42,000 per year to have a “luxurious retirement”.
If you are concerned about whether you are saving enough early on for your future retirement, we highly recommend consulting an independent financial adviser. The first meeting is free, and they can leverage their experience, knowledge and cash flow modelling software to help you project the appropriate sum you should be aiming for.
Option 2: working longer
Many of us dream of retiring early, whilst others dread the thought of ending our much-loved careers. For the latter group, they might relish the idea of working into their 70s or 80s. Others might fear they will need to do so out of financial necessity. Regardless of the precise details, delaying retirement can be a sensible option for some people.
Working longer can give you more time to build up your workplace or personal pension, for instance. Others might benefit from using this time to accrue more qualifying years of national insurance contributions (NICs), allowing them to receive a higher state pension income when they eventually retire.
Option 3: using pension freedoms wisely
Since 2015, the Pension Freedoms have allowed over-55s to access and start drawing from their personal or workplace pensions. Indeed, as of 2019-20, up to 25% can be withdrawn tax-free. Yet just because you have the ability to access this money early, doesn’t necessarily mean that you should.
Whist many people might benefit from withdrawing some of this money (e.g. to pay off the mortgage or fund a necessary renovation), there is a danger that it could severely hamper the growth potential of your pension fund. In worst-case scenarios, excessive withdrawals could lead to running out of money in retirement.
Consult your financial adviser if you are considering accessing your pension funds from age 55. Also, be careful to avoid any company or individual who claims they can help you access your pension savings before this age, for little/no tax charge. This is not possible under the rules at the time of writing, and so such a person is almost certainly fraudulent.
The prospect of a rising centenarian UK population is a daunting one for the pension industry and Financial Conduct Authority, which are devising strategies on how to fund this. Living to 100 also poses significant challenges to us as individuals. However, with careful forward planning and with professional help, these are certainly not insurmountable.
If you are interested in discussing your own financial plan or retirement strategy with us, please get in touch to arrange a no-commitment initial financial consultation at our expense: