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Tony Wickenden: Early start for long run

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It is not news that many people are likely to have to work longer if they are to maintain a required standard of living is not news. Despite this, the latest Pensions Policy Institute report is valuable as it provides powerful and stark support for, and corroboration of, this increasingly accepted truth.

In summary, the report finds that:

  • The proportion of over-50s staying in work has risen sharply since 1992.
  • To achieve a target replacement rate of income in retirement, people will need to start saving for retirement earlier than they do now.
  • Target replacement rate of income for this purpose is one high enough to achieve a similar standard of living in retirement as in employment. This, in turn, in estimated to be around two-thirds of pay.
  • Only 45 per cent of those over 50 and still at work and saving for retirement would be able to achieve this.

The conclusion is less bleak if the objective is to achieve a minimum income standard in retirement as opposed to full replacement. The minimum in this context is, according to the Joseph Rowntree Foundation, the lowest acceptable level before housing costs are taken into account. This is just under £11,000 for a single pensioner and £15,700 for a pensioner couple.

I reiterate that these latest findings will come as no surprise to all in the financial services and financial advice sectors. The (im)perfect storm incorporating economic hardship, low real rates of return, low annuity and drawdown rates, insufficient savings and greater longevity (to name a few) makes the outcome predicted by the PPI an inevitability. Most financial advisers will have clients who will be affected to some degree by the factors identified with the result that many will have to work longer to maintain required income levels.

With this in mind, as well as using the PPI statistics and others like them to engage with and encourage people to save more and start earlier – the importance of the early start factor cannot be overestimated – clients should also be made to see the importance of their health and wellbeing.

If longer working is going to be a reality for many, then maintaining your key asset class (yourself) in good nick is something that needs attention. It is all very well accepting that you are going to have to work longer but this will only be possible if you are in sufficiently good shape, physically and mentally, to be employable or capable of serving the clients of whatever business you own or work in.

And while it is perfectly acceptable to consider yourself and your income-producing capability as a valuable asset class in your financial planning strategy, it is important not to be overweight in you, so to speak. Arguably, this could apply literally as well as metaphorically.

The literal aspect is to do with the importance of wellness, the metaphorical touches the financial aspect. Balance is important, so some diversification into other financial assets, such as investment in pensions, Isas and other appropriate investments, will represent an appropriate method of building an uncorrelated financial cushion to take up any financial slack that may occur in later years due to reduced earning capacity, either enforced or chosen. Reduced earning capacity may well be chosen through a plan that is founded on a desire to work a bit less but not give up altogether.

There is also the need to build in some risk protection to cover income reduction or cessation due to ill health. If this is considered and acted on while in good health, possibly combined with commitment to a wellness/fitness programme that can bring down premiums as well as achieving a key primary purpose of reducing the chances of serious illness, then this could deliver a valuable and affordable solution.

Provision for your family and dependants in the event of complete cessation of income on death can be covered by appropriate life insurance held in trust for those you want to benefit.

The protection gap continues to be a feature of our financial lives. An approach founded on the increasing need for self reliance and the suggested focus on one’s self as an asset class may represent an interesting and potentially effective means of gaining the attention necessary if there is to be an acceptance of the existence of a protection gap. Without this acceptance and ensuing anxiety, action to close the gap will be unlikely.

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