It will not be lost on anyone in financial services industry that the average age at which people retire is increasing and as life expectancy continues to go up, retirement ages are likely to creep up.
However, while the Government and financial services industry have been busy hammering home the saving for retirement message, those working beyond the age of 65 face a growing problem of getting adequate protection cover.
Increased life expectancy is putting a greater strain on pension savings and more and more people are choosing to stay in work past the typical retirement age of 65. Office for National Statics labour market figures for June found that the number of over 65s in work reached one million for the first time as people choose to defer retirement for a few years either to top up their savings or because their savings are too low to allow them to retire or because they still have financial obligations that are compelling them to stay in work.
But the large numbers of people who are now working past what was the default retirement age only a few years ago raises some serious questions about people’s level of protection cover. As most protection policies routinely finish at age 65, what happens to people who end up working past this date?
Aviva protection market insights manager Donna Cowell says: “Many older people still have a strong financial need to work, with debt obligations continuing long past traditional retirement ages. The average age of first-time buyers has risen from 28 in 2002 to 35 in 2012 and with average house prices representing nine times average salaries, it’s no surprise that increasing numbers of people will be faced with mortgage debt into their sixties and later.”
In addition, to the usual risks that people are trying to cover themselves for by taking out protection, one of the main reasons given for people staying in employment in later life is to top up pension savings.
But if the over-65s become unable to work through illness or an accident they risk the double blow of no income in the short-term and potentially reducing their future income if they are still contributing to a pension.
There are some protection plans that offer cover to those over the age of 65 but advisers say the costs can be off putting.
As the risk of poor health increases with age, the risk to an insurer increases because people are more likely to claim on a protection policy. This inevitably translates in to higher premiums.
Highclere Financial Services partner Alan Lakey says most personal income protection policies stop at age 65. Some companies have extended their criteria but Lakey says there are only five plans which cease at age 70.
“If you go for guaranteed rates the costs are awful early on; if premiums are cheaper in the later years people put it off in the early years and if you go for a plan with premiums that increase annually, by the time you get to your late fifties – when you need it most – the costs become prohibitive,” says Lakey.
Personal Touch Financial Services head of lending Neil Hoare says: “Any insurer increasing premiums to build in the cost of an additional 10 years cover into the monthly premium at outset would only risk anti-selection, simply because they are catering for a specific sector of the market who might be more worried about the risk of not enjoying a long and happy retirement.”
Lakey says people don’t tend to value protection and some still think the state will provide for them in their later years.
“Insurance has to be sold in general,” says Lakey. “But we’ve lost so many advisers from the industry and if you have bad regulation, governments who aren’t brave, consumers who don’t value protection and advisers who don’t sell it, that is a terrible mix.”
London & Country Mortgages sales director Michael Aldridge says “Getting people engaged in protection when they are younger and costs are cheaper is the key to this, with some innovation in the way providers are catering for older consumers.
“We need to engage the younger generation and some portals have been looking at ways to make the underwriting process quicker but more needs to be done. People need to know what’s available, how much it costs and have personalised reasons why they need it.”
Aldridge favours a compulsory protection-led conversation for everyone in a broad financial discussion with an IFA, taking out a mortgage or starting a new job.
Lakey points out that people who are applying for a mortgage or loan could feel a subtle pressure to get cover if it could help their application. But for those already in their sixties, the immediate need is for insurers to take a more flexible view on age.
Some companies have taken steps to provide cover for this growing section of the workforce.
Skandia says it has been aware of the need to make its protection range available to older people for some time. Head of protection Ian Jefferies says: “Our term assurance provides cover for up to 50 years and customers can enter at 85, with a maximum expiry age of 100 years. We also designed critical-illness cover where one of the cover options has no maximum expiry age, which is I think unique to the market.
“Cover is inevitably more expensive for older customers but we focus on more affluent clients and many have protection needs around estate planning. The age profile of those customers is higher than the market average.”
One way of trying to bridge this growing protection gap for the elderly would be to offer a tax incentive to people to take out protection.
Lakey says one of the biggest problems with protection is that many of the people who need it the most do not get any encouragement as they fall outside the section of the public that is profitable for IFAs to advise.
“Those people need an incentive. I think IP could be given a real boost if the Government treated it like a pension, with tax relief on contributions and tax payable on the proceeds,” he says.
Bright Grey head of product development and technical support Ian Smart says: “Older people tend to claim and never return to work because their conditions tend to be degenerative. It’s a difficult balancing act for insurers. It’s difficult to take on this challenge without some sort of incentive for people to take out cover – potentially some sort of tax relief. There needs to be a middle ground where some of the burden shifts toward the individual, but you need to incentivise it.”
Even employees of companies that provide protection as part of their benefits are not exempt from this growing issue.
Friends Life senior proposition manager of protection Mary Bright says: “If individuals remain in work, they will often be covered by their employer’s group scheme. These do have upper age limits; as in the past it was not necessary for schemes to cover post-retirement age. However, if the demand is there, then the industry should seek to meet customer’s needs. But protection products for those working past retirement age will be higher risk and will cost the industry more.”
“I think in the near future, there will be modest extensions to the current upper age limits, as mortality data improves with a healthier older population, and new products designed to meet the needs of this age group will emerge onto the market.”
St James’s Place tax and technical director Tony Mudd says: “There is a big difference between personal and group income protection policies. Group policies can last until age 75 and employers can’t force people to retire. If you have a group policy, that has to remain until you retire,” he says.
But JLT Benefit Solutions director Lee Thurston points out that this has cost implications for employers, so that some are choosing not to offer protection benefits at all rather than take on the liability for older workers.
“Some employers are saying they want to scrap their schemes, some employers have their heads in the sand and some are changing their benefit structures away from ages, so that regardless of age, employees will get limited pay of two, three, four or five years,” he says.