THE FUTURE OF
RETIREMENT
One, two, three:
Optimising each stage of retirement
For professional investors only
Your income needs will change during later life.
Make the most of every day with these steps
All the world’s a stage,
And all the men and women merely players;
They have their exits and their entrances,
And one man in his time plays many parts,
His acts being seven ages.”
As You Like It,
play by William Shakespeare
The three stages of retirement
STAGE 1
ACTIVE
STAGE 2
PASSIVE
Shakespeare’s soliloquy on the seven
ages of man holds up surprisingly well
as a guide to financial planning in
retirement.
Although advances in healthcare mean we
need no longer dread progression from wise
justice to ‘second childishness’ via a ‘lean and
slippered pantaloon’, research shows there
are three stages to retirement. We should
structure our financial planning accordingly.
STAGE 3
SUPPORTED
Government figures show that the average
woman has 23.7 more years to live after the
age of 65, and the average man almost 21.51.
However, health, interests and needs change
dramatically during that time, which means
the money you spend changes too. It makes
sense to ensure you have made the correct
assumptions about the different stages so you
are on track with saving for retirement and
sensible spending during retirement.
Average number of years to live after age 65
Women
23.7
Men
21.5
1
Source and source for diagram above: Office for National Statistics, Expectations of life from 2014 based life tables, male
and female cohorts. Cohort figures incorporate assumed improvements in age-specific mortality
STAGE 1 - THE ACTIVE PHASE
The active phase of retirement is the part
that most of us are looking forward to.
How long it will last depends on health as
well as one’s outlook on life and resources.
Despite around 1.1 million5 pensioners continuing to work beyond
retirement age, this is still a time when most people begin to
decumulate, or take money out, from their pension. Remember that
25% is tax free from defined contribution pensions, whether taken
immediately as a lump sum or in stages.
It may be wise to take it more gradually – for example if part-time
income is coming in – leaving money invested in your pension for
longer.
Some people choose to retire early. In a 2011 report2, the UK
government cited three key factors that affect rates of early
withdrawal from the labor market: wealth, health and caring duties.
Some people prefer not to purchase an annuity but to keep their
pension pot fully invested. In this way, it has the potential to increase
in value and an income can be drawn from the pot on a drawdown
basis. This does carry risk, however, as capital and incomes fluctuate.
Lower annuity rates and the closure of generous defined benefit
pension schemes, however, have created strong financial reasons
against early retirement. The rise in the retirement age at which
pensioners can draw a state pension is also lengthening people’s
perception of how long they are expected to work.
Most people will already have considered estate planning before they
reach the active phase. Leaving assets to loved ones such as
residential property or part of a pension can have a major bearing on
pension income in later stages of retirement. The important thing is
to make the most of the active phase. After four decades of work,
this is a time to enjoy the freedom that can come from a wellfinanced retirement.
Nevertheless, most people retire in their sixties3, with the state
pension age a close proxy for the average age of retirement;
understandably because it remains an important element of many
pensioners’ retirement income.
According to NEST (National Employment Savings Trust)4, the
government’s UK workplace pension expert, the active phase lasts
typically from the mid to late sixties to the mid to late seventies.
Spending too little could mean being cash rich but health poor in
later life; spending too much could mean struggling to get by.
UK state pension age timetable
Date state pension age reached
2010
65
60
2018
65
65
2020
66
66
2028
67
State pension age
Source: www.gov.uk, figures taken from state pension age timetables. A sliding scale typically operates between dates
2
Source: Houses of Parliament, Postnote, ‘An ageing workforce’, October 2011
3
Source: ONS Pension Trends – Chapter 4: The Labor Market and Retirement, 2013 Edition
4
Source: NEST, ‘The future of retirement’, June 2015
5
Source: www.gov.uk, Department for Work and Pensions, October 2014
2046
67
68
68
STAGE 2 - THE PASSIVE PHASE
The second stage of retirement is often
known as the passive phase. According to
NEST, you typically enter it at around 75 and
it lasts until your mid-eighties.
However, everyone’s retirement staging will vary, with those who
retire early or in very good health having a longer active stage.
UK average weekly expenditure per person7
Annuity rates: single person, standard basis for £100,000
pension fund
Age
60
65
70
75
Level rate, no guarantee
£259.80
Age 65 to 74
£4,616
£5,203 £5,298
£7,118
3% escalation, no guarantee
£201.40
Age 75 or
over
£2,973
Source: ONS, Family Spending, 2014
Figures from the Office for National Statistics show that weekly
spending per person falls with age. While those in the active phase of
retirement – aged 65 to 74 – spend an average of £259.80 a week,
it drops to £201.40 for those aged over 75.
However, although spending declines, retirees should remember that
their money may not go as far as they expect. By this time, its value is
likely to have been eroded by inflation.
Those who have bought an inflation-linked annuity will escape this;
the state pension also increases according to the triple lock – rising
at the rate of inflation, the rate of average earnings increase or 2.5%,
whichever is the higher6. However, any other regular payments from
annuities may not increase in this way.
Some investors choose the passive phase as an opportunity to
purchase an annuity to lock in a guaranteed income. Remember that
annuity providers will typically offer a higher rate when you are older
because there are likely to be fewer years to pay out.
£3,577 £4,349
£5,303
Source: www.sharingpensions.co.uk Annuity rates at 1 December 2016. Assumes
pension fund of £100,000 after a tax free lump sum of £33,333 has been taken from
the full fund of £133,333 for a single life based on a central London postcode. Any
quantitative information including annuity rates is obtained from sources believed to
be reliable. Figures for illustrative purposes only. No liability can be accepted for any
direct or consequential loss arising from the use or reliance upon this information.
With annuity rates currently low, some people might want to hold off
purchasing an annuity in the hope that bond yields might be higher in
the future, although there is no certainty that this will be the case.
Investing in the stock market offers potential for capital to keep pace
with inflation. However, this approach carries risk, because the value
of your investments can fluctuate both ways. A good multi-asset fund
could be a solution since it spreads risk across different asset
classes.
Blending an annuity with a managed pension pot is also popular,
allowing peace of mind over a portion of retirement income while
retaining control over some of the capital for potential capital growth,
discretionary spending, and bequests.
6
Source: The UK government has indicated this will be the case for the remainder of this parliament, i.e. until 2020, but there are no guarantees. The inflation rate used here by
the government is the Consumer Prices Index.
STAGE 3 - THE SUPPORTED PHASE
The third, or supported, phase of retirement
can see costs rise again. This is when
many people need money for a care home
or a nurse to visit the house to assist with
day-to-day living.
The amount of money needed can be substantial. According to the
most recent Laing & Buisson report, the average fee for a nursing
home has increased by 3.8 per cent over the past year to £39,300
and for a residential home by 2.4 per cent to £29,300 per year7.
It’s at this point that the pension income may well not be enough and
people call on other assets such as the equity in their home. It is
important to have a plan to deal with this, whether it is equity release,
downsizing or using the remainder of the pension capital.
It is a good idea to make sure legacy planning is in place well before
this phase as mental deterioration can be a common condition for
older people. Making arrangements early can avoid distress later on
and ensure that the estate passes smoothly and as intended.
Many happy returns: Retirement may be longer than you think
122
Source: Wikipedia. Jeanne Calment, born 1875 in France, died 4 August 1997 aged
122 years; the longest lived human being to date.
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Each fund in the range is tailored to be appropriate to a particular investor risk profile. The funds have a competitive pricing point, with a
capped ongoing charges figure (OCF) of 0.75%8.
7
Source: FT Adviser, Live long but plan for care, October 6 2016
8
Source: As at 30 October 2016. OCF may vary over time.
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