Longer life expectancy, squeezed savings incomes, changing working patterns and regulations and the demise of final salary pensions are just some of the reasons why retirement is no longer taken for granted.
Just under half of Scottish adults believe they’ll need to work past their state pension age and 21 per cent think they’ll be in some form of work for the rest of their lives, according to research by Selftrade.
One in three of those expecting to work past their state pension age say they have insufficient savings and simply can’t afford to retire, the investment platform found.
“With the state pension age steadily increasing, it is a reality that we will have to work for longer than our parents’ and grandparents’ generations, and it is clear that people, particularly the younger generations are adjusting their expectations accordingly,” said Richard Donegan, managing director at Selftrade.
The number of people working beyond the state pension age in Scotland has almost doubled since 2004, according to Scottish Government figures published in May. They revealed a 94 per cent increase over that period in the number of workers aged 65 and over, with the employment rate among over-65s rising from 5.2 to 8.2 per cent.
The responsibility for retirement lies more than ever with individuals. So how can you make sure that retirement isn’t a mere pipe dream?
For anyone with an income and/or the means to save, the key lies in simple financial planning, according to Sarah Tory, financial adviser at Shepherd and Wedderburn Financial.
She carries out a straightforward exercise with people approaching retirement, asking them to list their current expenditure on the left hand side of a piece of paper.
“We then go through the list and assume they retired yesterday, we then write down on the right hand side what they would need,” she explained. “What from the left hand list is still there, what has gone, what has decreased or in many cases, what has increased or needs be added completely?”
That exercise alone can provide an insight into the sacrifices or extra savings that might be needed.
“It might be that by making a list you decide retiring now is not in your best interests and working a few more years may mean that your aspirations are a lot more achievable.”
One common mistake is to overlook the extent to which spending patterns and income needs to change in retirement.
“It’s a time where debts such as mortgages will hopefully be paid off and commuting costs usually cease,” said Iain Wishart, owner of Wishart Wealth Management in Edinburgh.
“But the majority of people will see their income reduce once they stop work, while you’d expect holiday and leisure expenditure to increase and utility bill costs such as heating will often rise as more time is spent at home.”
He recommends taking advice at least six months before the desired retirement date.
“Review your investments and cash savings, which can be a source of replacement income as you move from the accumulating to the spending phase of life.”
Pension arrangements should be reviewed too. Anyone planning to buy an annuity or enter drawdown should search the market for the most suitable deal, rather than buy immediately through their existing provider.
The challenge of funding retirement has been made more complex by last year’s reforms allowing people in defined contribution (DC) schemes to unlock their entire pension pot from the age of 55 without incurring punitive tax charges.
While the changes provide extra flexibility, individuals taking advantage of them also bear the responsibility for making their pension pot last for as long as it’s needed.
“For many people the greatest fear is outliving their capital and income. A proper financial plan can help address this and provide greater clarity, confidence and peace of mind,” said Wishart.
The need to make your savings last for as long as you need them is another reason why it’s so important to think about your needs and understand why you’re likely to get from your work, private and state pensions.
“Sensible cash flow modelling and putting cash funds aside for the first few years can have a demonstrable impact on life savings, ensuring they survive the effects of market fluctuations, especially likely in the more volatile world we find ourselves in today,” said Tory.