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As part of our ongoing series aimed at dispelling common misconceptions surrounding pensions, it’s time to challenge the traditional notion of retirement at 65. Whilst it’s true that many default retirement dates are indeed set to this age, data from the Mercer Master Trust suggest that the reality is that the majority of members, 75 per cent, have not adjusted their default retirement age to reflect their actual plans. Defined contribution (DC) doesn’t like default, when it comes to retirement dates.
The disconnect between intentions and actions
Insights from Mercer’s Destination Retirement planner, developed by Hub Financial Solutions and available on the Mercer Money app, show that 73 per cent of members who’ve shared their retirement plans are looking to access their pensions before they hit 65. This trend is further supported by the Financial Conduct Authority (FCA), which indicates that around 70 per cent of individuals are accessing their pensions prior to this traditional milestone.
This raises an important question: what’s driving this disconnect between stated intentions and actions? And, just because individuals are accessing their pensions, does this mean they are leaving the workforce altogether?
Government data indicates this may not be the case as alarmingly, 38 per cent of individuals accessing their DC pensions used the funds for immediate living costs, undermining the very purpose of these savings.
The growing pensioner population
The number of pensioners in the UK is projected to rise by 14 per cent over the next decade, from approximately 12.6 million this summer to 14.4 million by 2035. With the UK facing a recruitment crisis of 7.5 million vacancies and more jobs available than younger workers to fill them, encouraging older individuals to remain in the workforce could be a viable solution. In fact, there are nearly one million more individuals aged 65 and above participating in the UK labour market compared to the start of the century.
Informed decision making
“As we live longer, being in your 60’s is no longer considered old” explains Alan Nelson, UK DC Product Leader, Mercer. “It makes sense to support those who wish to continue working, allowing them to share their experience and help bridge the skills gap.”
“The crux of the issue lies not in when individuals want to retire, but when they wish to start collecting their pension. Are they working to supplement their pension or are they accessing their pension early to supplement their income? Understanding the pros’ and cons, including any tax implications of these decisions is crucial. It’s why we enable Mercer Master Trust members to model various pension scenarios, including early access to cash, to help them understand the implications of their choices.”
It’s evident that the phrase ‘default retirement age’ may no longer be appropriate as people are not necessarily retiring when accessing their funds. But whatever term we use we, as an industry, need to educate members on the importance of making choices as to when they want to access their pension funds. A mismatch can lead to some serious misalignment in investment strategies, potentially leaving many over or under-exposed to investment risk. Over exposed when you want to draw, and you’re looking for low volatility, and under-exposed perhaps when you are actually looking for investment growth.
Navigating freedom and choice
Freedom and Choice further tempts individuals to access their pension from age 55, regardless of retirement status. However, this flexibility may have unintended consequences. Mercer’s report ‘What’s the Price of Freedom?’, highlights the importance of informed decision-making in retirement planning to ensure that the choices members make today do not negatively impact future financial security.
