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Long distance

For the past 20 years, the pension industry has been talking about rising longevity with an increasing air of panic. How it affects the funding calculations for defined-benefit schemes, the pensions of those saving in a defined-contribution scheme or how people will phase in retirement rather than select one date to collect the carriage clock.

It now seems that others are starting to share these views. The Government recently issued a paper discussing our ageing society, where it announced it was bringing forward to next year the review of the default retirement age which allows employers to retire people at 65 even when they would like to go on working, the subtext being that the default retirement age will be abolished then.

This is a clear indication that the Government sees people continuing to work after state pension age as a big part of the answer to how to fund the gap between what their pension pots, together with the state pension, will pay them and the costs of a long retirement and potential healthcare.

The importance of having a decent pension will come into sharp focus. The Government heralds automatic enrolment as the solution to making sure that all have pension funds. But that is only one part of the conundrum.

As well as adequate retirement pots, we need sensible ways of taking the income. Retirement is changing. People will work for longer, meshing work with retirement, and we need solutions that match the income streams generated from their assets to people’s retirement needs.

Aegon recently carried out consumer research to gauge attitudes of people over the age of 45 towards guarantees and alternative retirement solutions. The results show that there is a considerable appetite for unit-linked guarantee products such as guaranteed drawdown.

Ninety per cent say they value guarantees on their retirement income and nearly 60 per cent are most likely to choose a retirement product that provides a minimum guaranteed level of income for life that offers the potential to increase over time. So the future probably lies in making sure retirement income products give the magic combination of both guarantees and flexibility.

But the final jigsaw piece is better understanding the relationship between income streams and income needs. The actuarial profession has highlighted that income in retirement can expect to increase sharply in the latter years, reflecting care costs. The UK has yet to propose a solution to how to fund this.

The Government took a teetering first step when it published its care and support green paper but it also sent out media shock-waves by suggesting a £20,000 premium for care insurance.

Now that the UK has accepted rising longevity, we are working out how people can pay for 20 or 30 years in retirement. The next step is figuring out how we also pay to insure against care costs and how the two entwine.

Rachel Vahey is head of pen- sions development at Aegon

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