Understanding Pensions 2020

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U N D E R S T A N D I N G P E N S I O N S 8 How to cope with the pensioner boom With the number of retirees set to surge in the coming decades, what impact could this have on the global economy and, importantly, the pension industry? s you read this there are some 7.7 billion people in the world. Not only is that figure increasing by the second, but so is the average age of our fellow planet-dwellers. Come 2050, the United Nations estimates this upward tra- jectory will have added another two billion people to the Earth's population. Significantly, some 1.6 billion of these 9.7 billion souls will be over 65, which means that in 30 years one in six people will be of retirement age. That compares to just one in eleven today. Of course, the planetary greying will not be evenly distributed: one in four people in Europe and North America is expected to be over 65, while the popu- lation of over-65s will double elsewhere. Meanwhile the number of people over 80 is expected to rise from 143 million today to an astonishing 426 million in 2050. That's not far off the present population of the entire European Union. Against this backdrop, 55 countries or regions will see their populations decline, many markedly, all helping to reduce the proportion of workers to dependents. Already in Japan that ratio is 1.8, so each pensioner is supported by fewer than two workers. In 30 years, 48 countries will have ratios under two. "These low values under- score the potential impact of population ageing on the labour market and economic performance, as well as the fiscal pres- sures that many countries will face in the coming decades as they seek to build and maintain public systems of healthcare, pensions and social protection for older persons," the UN warns. In other words, it's not looking good. And it gets worse when you consider stud- ies have shown that an ageing population will also reduce levels of economic growth. For evidence of this, look no further than the insipid economic performance of Japan over the last two decades. Mark Williams, chair of the pensions board at the Institute and Faculty of Actu- aries, puts the scale of the pension problem this way: "It's a little akin to climate change issues that are prevalent around the globe," warns Williams. So what needs to be done? Most impor- tantly, more money needs to be saved for old age – actuaries say it's £800 a month in the UK – which will probably need to come from increased employers' contributions as well as employees' themselves, and the state. "If everyone does something there is a set of circumstances that means you are not in a doom-and-gloom scenario," Williams adds. "But there is no doubt this means quite a big change, just as it does for climate change. "This is a massive issue facing our indus- try. The first step is to recognise it, then take the steps. But it will take a bit of pain and a lot of work." Monika Queisser, the economist who is head of social policy at the OECD, doesn't deny the challenges, but takes solace in the fact that effective retirement ages are increasing and labour-force participation among the elderly and women is rising. "There's no silver bullet," says Queisser. "Working longer remains the most effective way to deal with the challenge. By working longer you're reducing the time you have to be paid a pension and you're increasing the resources that go into the pension system through contributions." But she does not think people will con- tinue to work into their seventies in great numbers, mainly because for many, such as manual workers, it won't be an option. Sim- ilarly, while many countries have scaled back their pensions promises to balance the books, she says: "There's limits to how far you can go because obviously people need some sort of meaningful replacement of their earnings in retirement." This leads to her main concern: the pros- pects for old-age inequality. "This is some- thing that countries should be worrying about a lot more. It's also one of the reasons why increasing retirement ages is so unpop- ular because there's so much inequality in life expectancy, where you have peo- ple from high socio-economic groups who live much longer than people from lower socio-economic groups. This compounds over the life cycle," says Queisser. When you consider that income inequali- ties in developing and emerging economies are typically higher than in OECD coun- tries, as indeed are the health inequalities, then you begin to see the scale of the prob- lem. And that's before you account for the much higher proportions of the workforce in informal parts of the economy, many of whom are unlikely to fall within a pensions system, in developing countries. That's a figure which is as high as 80 to 90 per cent in India, for instance. "If those countries don't succeed in lower- ing health and income inequalities and edu- cation inequalities over the life cycle, they're setting themselves up for even more dramatic inequalities in old age," Queisser warns. In short, it could be a bumpy ride. So start saving and buckle up. in a sense that it's something that people know about and most people recognise it's a problem, but in terms of solving it, it's baby steps," he says. "At the moment, the pace of change is too slow for us to have a situation where things are going to improve in a way that isn't going to lead to a pretty big car crash at some point." So just how bad is the pensions short- fall? "There is no doubt that there is a gen- eration of people who are not going to be able to afford to retire at any sort of sen- sible age based on current projections," says Williams. "The implications of that are enormous." Just one is that even though the popula- tion of over-65s will soar, the numbers who actually retire will start to lag. "I would cer- tainly expect that people will need to work into their seventies," says Williams. Across countries in the Organisation for Economic Co-operation and Development (OECD), the official long-term retirement age average for those entering the work- force now is 66, while in the UK it's 68. But if Williams is right, this could just be the tip of the iceberg. If people can't afford to retire, they won't. Another factor in play is the economic health of those retiring in 2050; currently new retirees might reasonably expect to have paid off mortgages. But you might not be so lucky in the 2040s and this is not just a British problem either. "The trends for an ageing population and for there being an adequacy problem around pension sav- ing in a money purchase form are certainly A Alec Marsh It's something that people know about and most people recognise it's a problem, but in terms of solving it, it's baby steps OLDER P OPUL ATIONS SE T TO SURGE 2019 Number of people over 65 Share of people over 65 2050 A G E I N G United Nations 2019 1 in 11 1 in 6 0.7bn 1.6bn It should take about three hours to work through the course, although you don't have to do it all in one go. It sets out the steps to a financially secure retirement through a mixture of reading, short videos and activities. But we all learn in different ways and you may prefer listening to a podcast while you go about your daily life. Legal & General has teamed up with Strictly Come Dancing judge Shirley Ballas, who turned 60 this year but is certainly danc- ing into later life with a great deal of energy and pizzazz, to produce a series of podcasts on topics ranging from how coronavirus might impact your retire- ment income to sharing money with the family. Shirley is a brilliant interviewer, who chats to other retirees and would-be retir- ees, as well as tapping a panel of experts for explanations of some of the trick- ier pensions jargon. The podcasts, which each last around half an hour, are such an easy way to take in a lot of knowledge while you soak in the bath, go for a run or finish your commute. Find the whole Rewirement series at legalandgeneral.com/podcasts. You can also find Your Guide to Retirement Income online, our 20-page guide to a more colourful retirement. This is a straight-talk- ing guide that sorts fact from fiction. Did you know there is a 25 per cent chance that a woman aged 65 today will live to the age of 94? Or that about 250,000 Britons aged 65 and over live overseas? The guide helps you envisage your own, unique later life. Let's face it, there are so many different ways of enjoying life; retirement is no longer the cliff-edge moment it used to be and you might be looking forward to part-time work, volun- teering or studying for a degree. There are so many possibilities and this guide might be the best way to indulge in a bit of crea- tive, blue-sky thinking. One of the problems with financial plan- ning, of course, is that you don't know how your life is going to pan out. This is where online calculators can prove useful; many give you the option of playing with retire- ment dates or pension pots. Would you rather retire now on less or retire later with more? How much later and how much more? Maybe you'd rather aim at a specific goal; a calculator can show you what extra savings you need to retire in style. You can also compare the annuity on offer from your current provider with others. If you are aged 55 or over with a pension pot of at least £2,000, try annuit- yready.com to compare quotes and learn a bit more about what's on offer. Time to plan your pension Whether it's the new school year, or just the chill in the air, autumn is strangely invigorating. It's a time when many of us feel the need to reset our lives and lay some plans for the future utumn is certainly a good time to tackle a job you may have been ignoring. Few of us enjoy taking a clear-sighted look at our financial future, but spending a day on retirement planning is essential financial maintenance. We can't do it for you, but Legal & General has produced a range of resources that can help at any stage, whether you're starting to learn or wanting to brush up your knowledge. We do understand just how overwhelming retirement planning can feel. Our research shows that people spend more time choos- ing a car than designing the last third of their adult life; a bit odd, when you con- sider that planning your later life is prob- ably the most important piece of financial planning you will ever undertake. We know the coronavirus has increased uncertainty and brought financial worries to many; more than a million of those over 50 are now considering delaying retirement. So it is more important than ever to understand your options. By spending just one day on retirement planning, you can make a significant differ- ence to your future. It might be short-term pain, but it's very much long-term gain, with some juicy rewards to look forward to. So, what's the best way to start, apart from pour- ing yourself a big mug of coffee? Following the old proverb, that the best way to eat an elephant is to take it one bite at a time, the best way to tackle pensions is to break it up into manageable-sized bites. You may already have a lot of the information and knowledge you need, but key to making decisions is understanding. The better you appreciate your choices, the more confi- dent you will be in taking the route that is right for you. Pensions aren't as compli- cated as sometimes appears and there are many resources out there, from the simplest online calculator to more formal learning programmes. We believe there are five elements to consider: understanding how to work out the income you'll need in retirement; understanding how your pensions and Finally, don't forget there is personal help and guidance out there. If you prefer, you can speak to a financial adviser. Ask around for recommendations or go to unbiased. co.uk, which shows all the regulated advis- ers in your local area. There's also a direc- tory of advisers at the Money Advice Service (moneyadviceservice.org.uk), the govern- ment-run website offering free and impar- tial money advice. You can even get a free consultation with Pension Wise (pension- wise.gov.uk), which is also a government-run service to help you understand your pen- sion and explore your options. For more information please visit legalandgeneral.com/retirement the state pension operate, and how much income they should provide; understanding the different options for providing an income in retirement, and the pros and cons of each option; understanding the options available if your pension income is unlikely to provide sufficient income for you in retirement; understanding what other plans you need to manage your finances later in life. These five elements are covered in a free online course, produced by The Open University in collaboration with Legal & General. You can find the course, Retirement Planning Made Easy, at open.edu/openlearn/ retirement-planning-made-easy. A are considering delaying retirement 1m+ agree increasing life expectancy makes it more important to plan for later life 73% 58% of workers over 50 are concerned about the impact of the pandemic on their long term savings Attitudes to retirement (among over-50s) By spending just one day on retirement planning, you can make a significant difference to your future Emma Byron Managing director, Retail Retirement, Legal & General Commercial feature

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