It is often said that failing to plan is planning to fail. That is particularly true for retirement planning where putting off pension saving for even a few years can make a massive difference to quality of life later on.
Human nature is such that we tend to prioritise the reality of the here and now over the uncertainty of the years ahead. That is understandable when people are busy building careers, buying houses, bringing up families and setting up businesses.
At some point, however, we have to check whether we are on course to meet our retirement aspirations.
Britons are generally not good at planning for old age. In a paper on equity release earlier this year, The Smith Institute cited research showing that only 40 per cent of those aged 30 to 60 had a financial plan for retirement. It said: “The Government could look to address this by providing a financial MoT for those at 50 and on retirement.”
Retirement is a key milestone and a time typically when people assess their financial position and make decisions about how best to convert capital into income. The problem is that leaving the assessment so late in life reduces options and means that people – who generally have little financial education – end up reacting to events rather than influencing them.
Probably the most glaring example of this behaviour is in the long-term care sector where planning is almost non-existent right up to the point of need. It is only then that the true, extensive cost becomes apparent, resulting in many self-funders exhausting their savings, selling their homes and ultimately falling back on the minimum standards provided by the state.
Rationally, we all want to avoid this scenario for ourselves but that requires thinking about the future in time to do something about it.
Buying a home has generally been a good financial decision for those now heading into retirement but it could prove an even better one with a bit of foresight.
Recently released data from the last Census shows the growing importance of property wealth. In 2011 there were 9.2 million people aged 65 or over living in England and Wales – nearly a million more than a decade earlier. Over the same time, the proportion of those older people owning their homes has risen from 68 per cent to 75 per cent. And home prices in that time rose by 78 per cent – more than double the rate of inflation.
It is little surprise therefore that The Smith Institute said that the financial MoT should include advice on how housing assets can be utilised, particularly because of the high number of people whose property wealth outstrips their savings or pensions. It points out that housing wealth is more equally distributed than other forms of wealth such as pensions.
It is also true that as people progress through retirement, housing wealth typically becomes an ever larger proportion of overall wealth. This is partly due to the fact that savings and pension assets are run down or capital is spent on annuities, but also to the generally upward trend in house prices.
One positive consequence is that many people have the option of boosting their liquidity in later life by downsizing or equity release. In a time of squeezed pension incomes and with state benefits under pressure, it is difficult to see how property wealth can fail to play a bigger role in delivering financial support for many thousands of people as they head into later life.
Age 50 is the time to ensure that later-life financial planning is under way. It is old enough that retirement is a real prospect on the horizon but young enough to still have a few years of earnings to divert into pensions or savings if necessary. It may be too soon for any hard-and-fast decisions but it is early enough for people to start understanding the options and preparing the groundwork.
A financial MoT needs to act as more than just a financial dipstick of current asset levels and instead be the start of the retirement learning curve. Retirement income is an obvious area but there are three other big issues – health, care and inheritance – that are poorly understood by the general public but should be fertile ground for financial intermediaries.
Health is important to think about because, while retirement may reduce work stress, there is evidence that giving up work can lead to adverse longer-term effects, perhaps due to reduced physical activity and social interaction. We are living longer but healthy life expectancy has not increased so rapidly, meaning we spend more of our retirement years in poorer health, which can have a huge impact on both our cost and standard of living.
Care is a tricky area to plan for – not just because the whole structure of social care is currently under review and set for reform within a couple of years. About one in three older people require care in later life so, although the odds are against it happening to us, we should not be surprised if it does. And the costs can be huge for those needing care for longer than average.
Finally we have inheritance which, for most people, will be inextricably linked with property ownership. As The Smith Institute pointed out: “Many homeowners still want to pass down the equity in their homes to children rather than releasing it to spend on things such as home improvements.
“However, attitudes seem to be shifting with the younger generations more likely to see housing equity as an investment for retirement.”
We are being forced to shoulder more financial responsibility for later life, in particular for our income and care needs. The state may be withdrawing some of its support but it needs to be careful to fill the void with clear policies and greater public awareness, particularly of the benefits of investing time in financial planning.
Professional intermediaries have a major role to play in this transformation and many forward-thinking adviser firms are starting to focus on the key stages of pre-, at- and post-retirement.
Last year, those reaching age 65 across the UK had assets worth around £100bn. Many of those billions will be converted into income in the next few years, with much of the rest ultimately spent on care or passed on as inheritance. For professional planners, the scale of the opportunity should not be underestimated.
Stephen Lowe is group external affairs and customer insight director at Just Retirement