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'Flexible' retirement a 'mirage', says Royal London

'Flexible' retirement a 'mirage', says Royal London

by William Robins Feb 27, 2017 at 10:31

A flexible retirement, where people carry on working to top up pension income, is a ‘mirage’ according to insurance giant Royal London, and will result in having to work well past age 70.

Pension provider Royal London has produced research looking into what would happen if someone who has only contributed the minimum to their pensions under government 'auto-enrolment' rules, decides to draw a state pension as soon as they can and immediately cuts down to part-time work. 

As with previous Royal London reports, it defines a ‘gold standard’ retirement (income at retirement is two-thirds of pre-retirement levels) or a ‘silver standard’ retirement (income is half of pre-retirement levels). 

For those who want a pension that provides a flat income with no inflation protection and no support for a widow/widower:  

  • Someone pursuing a flexible retirement would have to work until they are 79 to achieve the ‘gold standard’. The age comes down to 74 for a worker who defers taking a state pension and maintains full-time hours until they stop working.
  • A worker targeting ‘silver standard’ retirement but who retires gradually would have to work on until they were 69 – or 68 if they defer their state pension and continue in full-time work;

The report encourages workers to contribute more than the legal minimum of 8% (combined employee and employer contribution) to a workplace pension.

It said a 10% rate allows an individual to retire around three years earlier, while a contribution rate of 12% allows an individual to retire around six years earlier than if they contributed just the minimum.

The minimum contribution levels for auto-enrolment – which automatically puts workers into a company pension scheme if they are not already in one – were set while Steve Webb, now director of policy at Royal London, was pensions minister under the coalition government.

Before 5 April 2018 the total minimum contribution is 2% (including staff contribution), rising to 5% from 6 April 2018 and then  8% from 6 April 2019. After that it is expected the minimum rate will rise further but no firm plan has yet been set.

Webb said: ‘A flexible retirement, where we can gradually reduce our hours and stop work at an acceptable age, is likely to be a mirage for millions of people based on current levels of saving,’ he said.

He added: ‘The good news is that there is an antidote to excessive working lives and this is higher rates of pension contributions.   We find that each one per cent on pension contribution rates takes at least one year off the number of years for which you have to work to achieve a decent retirement.’

The government will undertake a review of auto-enrolment this year which will include looking at contributions minimums. Chris Curry, director of the Pensions Policy Institute, will head up that work.

The current pensions minister Richard Harrington said last month he thought people should be aiming for pots of around £250,000 by the time they retire.

Research for Citywire's New Model Adviser® by pensions Aviva, earlier this month, indicated that an individual whose salary builds up to £27,000 over their career and saves for 40 years with no breaks would need combined employee and employer contribution levels of 25%.

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Comments  (3)

  • Andrew Hill: 

    So the pensions minister reckons people should aim for pots of £25000 by the time they retire. Is this a missprint or is he delusional. Surely you would need quite a number of these pots.

    Or then again perhaps £25000 might just be enough to ensure that retirees do not quqlify for any state benefits.

    15:28 on 27 February 2017

  • PaulSh: 

    @Andrew, either the article has been corrected since you made your post or you miscounted the number of zeros as it (now) clearly says the pot value should be around £250,000.

    16:48 on 27 February 2017

  • LG43: 

    Retirement has always looked to me like 6 months of "freedom", followed by boredom . It is now 16 years since my first of 4 retirements - each of which was followed by business opportunities, happily minus the previous corporate overheads! I have at least another two retirements to go, assuming nothing new starts itself. OK I like working a couple of days a week.

    Some thoughts:

    Debt for sound business purposes - essential - good - but repayment needs to be the objective. Consumption borrowing is often essential, but can become a drug.

    Pensions savings are essential - but they absolutely need to be backed up by an affordable lifestyle that gets you to a mortgage & debt-free existence , by age 60. ( you cannot achieve that by using "equity-release " in any form for interim lifestyle enhancement).

    How much of a pension fund do you need? That depends on the above....which was always my target.

    Once one achieves the debt -free objective some unexpected things happen


    1. expenditure declines - because cash , unlike debt, is totally inflexible . Every significant outgoing is sincerely"felt" and scrutinised.

    2. freedom from the grind of monthly repayments gives a mental boost , and enhances the ability to recognise opportunity..

    3.The thought of borrowing - even a car loan - becomes unacceptable.

    The problem of retirement funding therefore starts many years before with a determination towards defined objectives. Starting to think about it in your 50's in the context of a debt- "or equity-released" lifestyle is just too-little and far-too late!

    18:43 on 27 February 2017

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