As many of us ponder retirement and a slowdown from the busy work environment, what do we expect will happen?
As I look at pension providers’ marketing literature both on the web and in print, it all looks great. The most healthy looking 60-somethings with ultra-white teeth, tanned skin and the most beautiful-looking grandchildren ever.
There appears to be loads of cash swirling about, with some material showing our new pensioners on board small yachts or playing golf. It certainly looks like the good times have arrived, according to the marketing.
But is it just clever marketing? Images that conjure up feelings of warmth, wealth, care-free living and an attitude of spend and live life to the full – I wonder if the reality for many is not quite what the brochures would have us believe.
Whether one retires with a public sector pension or a private pension, the ultimate aim is to have as much corralled in the most tax-efficient pot that will see us through to our 80s and 90s. I recently chatted with a senior college leader who at 60 was now ready to ride into the sunset. His dilemma was picking the right time to retire to optimise his payout and resulting pension each month.
Ostensibly, he would get a decent lump sum that would either pay off the mortgage or allow for a holiday, some small luxuries, the remainder then sunk into a low-risk investment that would pay interest each year. The second part of this would be his annuity or what has always been known as the major funding part of old age. He would get a pension paid for life that would be index-linked and ensure that, just like his salary, he would receive a monthly income that he could budget his lifestyle upon. Lifestyle being the key here.
Only a small percentage of the population will be able to live like the people in the marketing brochure. Many, and indeed the majority, will have to tighten their belts and ensure they do their sums again and again. With the cost of long-term care rising, should one need residential care coupled with the need to fund the “bank of mum and dad” as our offspring appear to need us that bit longer, budgeting for a long life after work is crucial and for many a sobering reality.
A Scottish teacher who has worked in a school for say 40 years, earning a final salary of £45,000, joining the workforce at 21 can retire on a maximum lump sum of £120,000 with an annual pension of £18,000. The lump sum may sound a lot, but can quickly get eaten up paying off “stuff”, while the annual pension is about half what she would have been paid after taxes etc.
On my reckoning, there won’t be much room for dental implants at £20,000 and a £20,000 yacht harboured in a small Greek port. Far from it. This pensioner will have to prepare for fuel costs rising, the cost of owning a car rising, transport costs rising, community charges rising and a whole lot more.
All this while the Bank Of England interest rate appears to be holding out well below 5 per cent with the new normal more like 2 per cent. So, interest on what is left of her lump sum, will be small. One only needs to look at the NS&I Income Bond rates to see what is on offer - a measly 1.9 per cent gross if one ties up cash for three years.
Notwithstanding retirement marketing brochures, the lifestyle we may want, versus the lifestyle we may actually get, is not all about a pension. How we plan for our retirement ten years before we actually do so is also important. Downsizing houses, cars and commitments can all play a part in preparing us financially for that day we hang up our spurs.
Thinking hard about lifestyle and how we want to function in retirement is just as relevant to planning our budgets. Ultimately, we all want good health. But, thinking now about what “retirement” actually means will help us make sense of money and the new opportunities that will open up with our free time.
Jim Duffy MBE, Create Special.