CASH-strapped Scottish pensioners are returning to work in growing numbers as the economic downturn plays havoc with their finances.
Almost a million people aged 65 and over in the UK are still working or classed economically active, an increase of 123,000 in just two years, according to recent government figures.
And that includes thousands of Scots either putting off their retirement or returning to work in an attempt to bolster their fragile pension incomes. Whether hoping to recover pension investment losses, delay buying an annuity or boost household finances at a time of rising prices, more retired Scots than ever before are working longer than they had expected.
Those hoping to carry on working were boosted last year by the phasing-out of the default retirement age, meaning employers could no longer force people to retire at 65.
The Office for National Statistics predicted in its latest Pension Trends report that people “will be increasingly likely to continue working” beyond the traditional retirement ages over the coming years as the squeeze on pension savings intensifies.
The report revealed that between April and June last year 7.3 per cent of men and 8.9 per cent of women of retirement age were in part-time work, with another 4.6 and 3.6 per cent respectively in full time work.
Its numbers support similar research by insurer Prudential. More than two-thirds of Scots delaying their retirement say they can’t afford to retire yet, the Pru revealed, with 54 per cent considering working for another year so they can build up the savings they need to bolster their pension incomes.
The reasons for that are myriad, but largely linked to the economic downturn of recent years, with pension investments hit by market volatility, annuity rates plunging to record lows and savings ravaged by a combination of inflation and low interest rates.
Logan Steele, general manager of Age Scotland Enterprises, said: “Securing a comfortable retirement has become an ever more challenging task in recent years, and despite a welcome increase in the basic state pension of 5.2 per cent from April 2012, many people won’t have enough money to maintain their living standards once they stop working.”
One problem faced by many – including case study Muriel Milne – is that a lifetime’s savings can produce a disappointingly meagre pension pot, particularly for the majority banking on investment growth to bolster their fund.
A growing number of pension investors disgruntled at their pension values have taken their cases to the Financial Ombudsman Service, The Scotsman can reveal. Complaints rose 43 per cent in the second half of 2011, fuelled by a rise in grievances from retirees whose savings were less substantial than they’d expected.
But with the cost of living on the rise, those finding their pensions insufficient to support their retirement are increasingly forced to look for new sources of income – often returning to the workplace.
Brian Steeples, managing director at The Turris Partnership in Glasgow, said: “Most people have high debts and low savings and cannot afford complete retirement. Less than half of workers are in a pension scheme but advances in medicine have given us prolonged life. Unfortunately, most people do not have sufficient resources to pay for this prolonged life – and a longer life without resources is simply longer misery.”
However, there’s also an element of choice, with more people wanting to decide for themselves when they finish their working lives rather than be dictated to by a state pension age that is set to change over the coming years.
Douglas McIntyre, managing director of Loch Fyne Financial, said: “Those who go back to work or decide to continue working beyond pension age typically do so to feel relaxed and secure about their financial future.”
The appeal of staying in or returning to work, even part-time, is that it can help keep your retirement resources intact for longer.
“The concept of complete retirement is becoming outdated,” said Steeples “Continuing to work and earn will allow you to have more to enjoy later, when you might need it. It also helps more resources to be available later in life to offset the effects of inflation.”
If you’re a few years off pension age but you like the idea of being in control of your own retirement date, it’s essential to plan ahead.
Setting out a cashflow model can help you meet your financial goals and work out how long it it is financially necessary for you to continue working.
“This can put in context your income and outgoings as a measure of how much you require in order to achieve financial independence, not only determining if you need to continue to work, but if so for how long,” said McIntyre.
Working after the state pension age has other benefits that could boost your income later in retirement. For example, for every five weeks that you defer taking your state pension the payment goes up by 1 per cent. Deferring for a year earns you a lump sum plus interest of the Bank of England base rate plus 2 per cent.
Continued employment may also allow you to stay invested and, perhaps, carry on contributing to savings or a pension. But while basic rate taxpayers can get 20 per cent tax relief on pension contributions their pension income is also taxed at 20 per cent once they retire. That leaves individual savings accounts (Isas), into which you can currently pay £10,680 a year tax-free (£5,340 in cash) as the most tax-efficient savings option.
A dramatic decline in the income paid by annuities has forced more Scots to leave their pension untouched at retirement in the hope that annuity rates will rise again. Some 25 per cent has been knocked off annuity rates over the last four years, leaving those retiring this year with the prospect of a raw deal on their lifetime pension savings.
If you do decide to take an annuity, make sure you look around for the best rate, rather than settling for what your pension company offers you.
With the best deal paying some 20 per cent more income than the least competitive, taking time to shop around can pay dividends for the rest of your life.
“Many people think that they need to accept the annuity offered by their pension provider, but the fact is that they have the right to shop around for the best rates and the right type of product,” said Steele.
“In addition to standard annuities, there are enhanced and impaired life annuities for those who smoke or suffer from health problems, so it’s crucial to choose the type of annuity that best reflects lifestyle and personal circumstances.”