The Stark Statistic That Will Rule Your Retirement

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By

Malcolm Wheatley

Published in Investing on 29 February 2012

It's official: we really are retiring later. But what to do?

Here at The Motley Fool, we cover retirement-related issues quite often.

And there's a reason for that: as investors, retirement is one of the prime considerations that we all have in mind when we invest.

Not for us, we hope, the grinding poverty of an extended old age.

Fact or fiction?

Yet in truth, the vast ongoing pensions debate lacks hard facts at times. It's a fact that we're all living longer, for instance -- official government statistics back that up.

But official data on savings and investment provision is hard to come by. The Office for National Statistics' first and only study of wealth in Great Britain came out in late 2009, based on data collected in 2008.

And another supposed 'fact' -- that we'll all have to delay our retirements, in order to save more for our pensions -- generally turns out to have a basis only in the various surveys carried out by those in the pensions industry with an axe to grind.

Last week, for instance, insurance company Prudential (LSE: PRU) revealed that it had estimated that more than one in ten of the 550,000 people who were due to retire this year had changed their plans. While some had done so because they enjoy working, the vast majority were putting it off because they couldn't afford to retire as planned.

It's official

Coincidentally, official data has been released that endorses this view. Which, I think, is quite significant.

In short, the message from the pensions industry isn't just scaremongering hype from parties with a vested interest, but is hard, official fact.

Which does, I think, make a difference.

In other words, if you're tempted to dismiss pension industry-generated 'news' as self-serving hype, do so no longer. Delayed retirement is real, and is happening to people like you.

A year longer

Simply put, in 2010 -- the latest year for which data is available -- the average age at which men left the labour market rose to 64.6 years, up from 63.8 years in 2004. For women, it rose from 61.2 years in 2004 to 62.3 years in 2010.

Put another way, across the two genders, people are retiring almost a year later than they were just six years earlier -- with the charts showing no sign of the trend reversing or slowing down. Indeed, for women, the age of withdrawal from the workforce appears to be accelerating faster than it is for men.

And what's especially interesting about this is that for the cohort in question, government-mandated extensions to the retirement age haven't affected the data.

In other words, it's economics forcing a later retirement age, and not the rule book.

Stark choice

What to make of all this? For me, the lessons are simple.

One of the great things about investment-generated wealth is the enhanced freedom of choice that it provides.

And in this case, the choice in question is when -- and how -- to retire. As late as possible, in order to eke out meagre savings and an equally meagre State Pension? Or -- within limits -- when we like, with our standard of living buffered by a decent and rising investment generated income?

I know which option I prefer.

SIPP or ISA?

What to do? It's easy to spot what not to do.

Pension funds often have high charges. Even stakeholder pensions still take a slice of your money -- and in a low-return environment, 0.6%-0.7% of your fund value is quite a hit. Cash ISAs? Well, net real interest rates are currently negative, so no joy there then. Property? Popular, yes, but illiquid. And so on.

In fact, to my mind, there are only two sensible courses of action.

  • Save for retirement in a stocks and shares ISA, benefiting from the higher returns that the stock market offers. Individual shares too risky? Sensible diversification and a long-term perspective go a long way. Failing that, there are funds or simple low-cost index trackers.
  • Save for retirement in a SIPP. With the same investment options as an ISA -- funds, shares or trackers -- a low-cost SIPP offers tax relief, currently at your highest marginal rate. Which is especially attractive if you're a higher-rate taxpayer now, but likely to be a basic rate taxpayer in retirement.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

goodlifer 29 Feb 2012 , 7:33pm

SIPPs are, for all I know, a good idea if you're lucky enough to be a higher rate taxpayer.

Are they really a good bet for us lesser mortals?

MDW1954 29 Feb 2012 , 10:29pm

Hello goodlifer,

I think you've previously indicated that you were in your eighties? (Forgive me if I've got that wrong!)

When writing the article, I must confess I had a somewhat younger demographic in mind -- 40s/ 50s, say.

For basic rate taxpayers past 65, I'd be tempted towards an ISA, I must say -- and that on grounds of reduced form-filling, and the age-related allowance.

Malcolm (author)

Hannibalis 01 Mar 2012 , 8:31am

Don't forget about company retirement schemes, especially those there the company matches your payments.

My own strategy was to put anything I earned attracting 40% tax into a pension, using stocks & shares ISAs for other investments and keeping cash in my non-working wife's name (to avoid tax).

But the main change as I approached retirement was to bear down heavily on every aspect of expenditure, finally reaching the happy state of earning enough on my investments to cover my basic living expenses. Then I lost my job - but no worries!

http://www.the-diy-income-investor.com/2012/01/its-getting-harder-to-plan-for.html

goodlifer 01 Mar 2012 , 9:49am

Thanks Malcolm,

Yes, I'm in my eighties
But I'm lucky enough t have some friends and relations who are even younger.

Blackboar 01 Mar 2012 , 1:16pm

The lack of tax benefits for lower rate taxpayers in SIPP's is a disadvantage, but to me the greatest benefit is that you cannot get at the money until you retire. Many people need that discipline to ensure they have a pension at all. My wife and I save in SIPP's and ISA's and we willl take the maximum 25% on retirement and put that in the ISA's as well.

DrFfybes 01 Mar 2012 , 1:26pm

The biggest kick is for those of us in the target demographic for this article who are now being forced to work later and have had their carefully arranged plans shot.

For example a few yeas ago MrsF. was planning to finish at 55. She could take early retirement with reduced pension under her pension scheme rules, and 5 year later the OAP would kick in.

We'd figured on a ballpark figure of having £10k in savings for every year she would finish early, which would allow us to live at the same level before the pensions kicked in.

So, in 2005 we had 10 years in which to find £50k. We could cope, no kids to support, no mortgage, good incomes. Then came the 2007 pensions changes and retirement at 65. Suddenly we had to find £100k, and only 8 years in which to do it.

And then it was 11 years, and now it looks like it will be 12 years, with only 4 years left in which to make up the ground.

And then her pension shceme changed too, she missed the 85 year LGPS rule by being a few months too young, another kick to our careful plans.

So it isn't just those that don't prepare who have to work longer.

PundaMalia 01 Mar 2012 , 2:10pm

You say that you have published several articles about retirement, but they have all been about approaching retirement and when you are going to retire. In traditional terms you write about what to think of and what to do in your 40s, 50s and early 60s.
What about some articles on managing your money and living in retirement? Give us some thoughts for those post-retirement in their late 60s, 70s, 80s and 90s. And as the demographics change you will no doubt need to think about financial management when we are 100+.

taken2often 01 Mar 2012 , 2:30pm

ISA or Sipp. The ideal is to have both, one for flexibility one for retirement.

The ISA could grow between income and growth by about 3/12% a year or go down.

The SIPP gives you a minimum of 20-40-50% profit depending on your tax rate for each contribution and you still can get the 3/12% income growth or go down.

When you come to retire you can still hopefully get 25% tax free lump sum. This could then go into a dividend growth/fixed interest ISA.

The best thing about a Dividend/Fixed interest fund is that you do not need to be concerned with the ups and downs of the markets. In fact during the accumulation years you use the income to buy more on the down side. This can have a magical effect in the long term.

Pensions have a bad press due to the Rip Off merchant advisors. Biased restrictive government regulations which gives you sense that its your money but you cannot use it in a sensible manner.

Cheers

algorhythmic119 01 Mar 2012 , 2:49pm

Taking an even younger demographic, what kind of action should a young person, just starting out in work, and therefore only able to save a modest amount each month, take to start building a stocks & shares ISA with a view to eventual retirement? I assume some form of tracker fund would fit the bill to start with, but I am also a novice investor, so don't know what best to suggest. Any ideas?

harryjim 01 Mar 2012 , 2:58pm

Raising the age of retirement solves the government's pension financing problem. More people will die before they retire! Simple really.

JaxH 01 Mar 2012 , 5:40pm

Speaking as one of the unlucky ladies who had planned all my career to retire at 60 (which would have been 2 years time), who now has to work until I'm 66 AND who just got diagnosed with a long term condition that doesn't make me ill enough to not work, but does seriusly shortern my lifespan - I'm pretty pissed off by this.

goodlifer 01 Mar 2012 , 8:54pm

Hi again MDW1954,

MDW1954
"For basic rate taxpayers past 65, I'd be tempted towards an ISA."
What kind of an ISA?
And why?

We considered organizing a SIPP for my wife some while ago, but we decided against it.
Here's why.

First, sooner or later you have to cash in your investment and buy yourself an annuity.
Two terrible risks: if Mr Market has one of his moods at the wrong moment you might not even get your investment back.
And all the annuity rates I've seen are strictly lousy, and quite likely to get even worse.

Second, there are some quite nasty restrictions on what happens to your money after your death.

I'm aware that the goalposts have been moved, so I may be rather out of date.
But what's to stop this government, or the next lot, moving them again?
Who wants to be at their mercy?
Not me!

And hi algorhythmic119.

FWIW, I've just about managed to persuade my son to open a joint investment account - his money, joint management.
The plan is to build up a portfolio of reasonably yielding, reasonably diversified shares by reinvesting the dividends together with any funds that may, every now and again, become available.
Can you think of anything better?
Good luck!

sippquixote 01 Mar 2012 , 11:34pm

Good on you Hannibalis!

Bearing down on costs approaching retirement is what it is all about.

Getting rid of all debts is even more important. Everyone I know who has gone into retirement with debts has subsequently had problems.

GROAD
get rid of all debts

Illiswilgig 01 Mar 2012 , 11:36pm

Delayed retirement? Yes I suppose so. But I'm not sure that I want to stop working yet. I started saving at, oooh, err, around age 18 from memory and kept on going once I actually got a job at around 21 and I've been investing instead of saving since 25, and as I've just turned 50 that's for about half my life. Frightening. I left full time employment 7 years ago and since then I've been working self employed at a pace that suits me.

I've never wanted to hand over my hardearned to someone that I couldn't see or to somewhere I could not actually put my hands on it. Luckily for me my savings and investment have NEVER included a pension (well not voluntarily anyway, there is a small one from a few years of involuntary membership that I may never get to claim). So it's entirely up to me on a year by year basis whether I work or not. Intriguingly it also gives me pricing power in my self employment (as a woodturner) as I don't have to price jobs to win and can afford to price the jobs I want to do.

As far as I can see at the moment any savings in a pension, whether SIPP or not would simply have reduced my current flexibility and seriously reduced my quality of life. Surely it's a con?

cheers

Mark (self employed woodturner)

algorhythmic119 02 Mar 2012 , 1:16pm

Thanks, goodlifer, joint management sounds a good idea. I will keep researching and (hopefully) learning.

somedangfool 02 Mar 2012 , 4:47pm

Goodlifer - I don't believe you do have to buy an annuity.

If I remember correctly, post 'A-day' it has been possible to draw only the income, and not all of that, provided you have a minimum level of income (£20k I think).

For smaller SIPP holders, that may not be an option, but it does represent a welcome improvement in flexibility. There are issues with a liablility to income tax if you peg it and leave the capital to others, but I'm sure you can find out more here and elsewhere.

goodlifer 03 Mar 2012 , 12:44pm

Thank you, somedangfool

My guess is that the vast majority of SIPP customers are "smaller."

PremiumBond 04 Mar 2012 , 10:07am

ISAs are important for rainy days and for those trying to avoid clawback of personal allowance. However the tax free lump sum makes pensions more tax efficient regardless of your tax rate.

People seam to miss that although SIPPs and ISAs are equal for basic rate tax payers on in/out tax relief the lump sum sweetens the deal to make pensions the most efficient.

Without this sweetener why would you give up access (unless because you are lacking discipline).

ianguerin 04 Mar 2012 , 8:17pm

algorhythmic119 - did you your employer has to enrol you into NEST (the govt's new pension arrangement) from 2013, the start date depending upon how many employees your company has. You will get the employers contribution & tax relief on your own contributions, so it's worth investigating

rouge14 05 Mar 2012 , 2:34pm

A point I have not seen elsewhere in this debate is that if someone has an ISA worth over 16k this may affect their ability to access benefits. I say this not to provoke anger but in the unfortunate event that someone needs the safety net of government aid should they become unemployed, ill or need to care for someone who is ill or elderly.
Whereas if that same money was in a pension I dont believe it would be an issue.
Correct me if I am wrong but should this not be part of the decision about saving?

Clitheroekid 05 Mar 2012 , 8:20pm

The thing I hate most about any form of pension is handing over my assets to someone else forever, and knowing that I will never have control of them again.

15 or 20 years ago, when it would generate an annuity of 13% or more it would probably have made sense. But nowadays, with annuity rates of around 6% and likely to fall further it seems to me a laughable proposition.

In any case, I have a deep loathing of the `professionals' who run pension funds, and it's now a matter of principle with me that I would never allow them to have custody of my hard earned cash.

I realise that with a SIPP I can have the investment in property or something that's not managed by them. However, I personally consider the penalty of surrendering total control of one's assets to be far too hgh a price to pay for some tax relief.

I've theerfore decided to resist the siren call of tax relief and retain control, investing my annual maximum in equity ISA's.

My plan is that once I retire I'll gradually spend it all until I pop my clogs with a zero balance. In effect I'll be my own annuity provider (though getting the timing exactly right will definitely be a challenge!)

mjcopinger 06 Mar 2012 , 9:24am

@goodlifer

"First, sooner or later you have to cash in your investment and buy yourself an annuity."

One of the major advantages offered by a SIPP is that you DONT have to cash in and buy an annuity. Another is any money left in your fund when you die is passed on exempt from inheritance tax.

goodlifer 06 Mar 2012 , 12:26pm

Thanks mjcopinger,
"Any money left in your fund when you die is passed on exempt from inheritance tax"
Are you sure?

But my main reason for distrusting SIPPS is that if some government moving the goalposts yet again I can't access my money. .

Abesimon 11 Jul 2012 , 1:52pm


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