Are you jeopardising your retirement plans?
Thousands of people will never realise their retirement dreams because of mortgage debt and insufficient savings - and because the choices they make today are jeopardising their plans for tomorrow.
Last year, research from Prudential revealed 1948 was the luckiest year to be born, with people now aged 61/62 enjoying the best of free healthcare and education (not to mention the free love of the 1960s) and the possibility for an early retirement relatively free of financial woes.
However, a new survey from Aviva paints a very different picture. It found people aged between 55 and 64 are putting their retirement dreams at risk because their finances are in such bad shape.
Not only do they have the lowest level of savings and home ownership, but they also have the largest average mortgage debt.
The report found that two fifths of pre-retirees aged between 55 and 64 save nothing each month, while one fifth still owe more than £75,000 on their mortgages.
Mind the gap
By 2011, there will be almost 18 million people in the UK who are over 55 - and Aviva believes the UK is at risk of becoming a society of haves, and have nots.
The gap between the richest and the poorest is widening across all age groups, but is at its largest for people aged between 55 and 64 with small number of rich people disguising the relative poverty of the large minority.
For example, the average amount of savings for this age group is £57,002. However, the median amount – or the more typical saver – is just £7,593.
Meanwhile, while non-mortgage debt is not a significant issue for most people over 55, some people are still working to pay off debt and pre-retirees have the highest level of debt at £2,851. Pre-retirees also have the lowest value properties (£225,988) and are the most heavily mortgaged with over 26% still having a mortgage.
"This report shows a worrying picture whereby those who are already retired are actually - to a large extent - financially better off than the pre-retirees,” says Clive Bolton, retirement director for Aviva Life.
“Their income might shrink as people retire but the current generation of retiring and long-term retired have a higher incidence of homeownership, lower debts and more savings than the pre-retirees.”
Poor pension provision
While the Aviva report suggests many people are failing to take responsibility for their retirement, poor pension provision is also attracting blame.
Politicians and pension providers have let investors down, with the current state pension system “not fit for purpose”, according to Tom McPhail, head of pensions research at Hargreaves Lansdown.
“We should be encouraging as many people as possible to save for retirement; the fact that 39% of people aged between 55 and 64 are not saving at all shows the system isn’t working,” he adds.
The average personal pension pot has dropped by a staggering 60% over the past decade, according to data provider Moneyfacts.
Richard Eagling, editor of investment life and pensions at Moneyfacts, says: "Given that the last decade presided over a dotcom crash and a credit crisis, it is hardly surprising that pension funds have performed so poorly.”
He adds that the only way to prevent this trend continuing into the next decade is for individuals to increase their contributions and take greater interest in the returns generated.
Another key finding in the Aviva research is the lack of understanding about annuities, or pension income, among people aged between 55 and 64.
According to the Aviva report, the majority unaware of what affects factors might their annuity payouts – in fact, many people don't fully understand that they derive income from one.
All retirees have the right to shop around for an annuity rather than take the deal offered to them by their pension provider – this is known as the open market option. However, many fail to do so – meaning their income in retirement could be less than they are entitled to.
For example, it is estimated that 40% of people could benefit from taking out an impaired or enhanced annuity. These annuities are available to people who have illnesses or health conditions - such as obesity - that are likely to have an impact on the length of their lives.
Consequently they provide a higher than average monthly income.
“Crucially, the Open Market Option should be the default at retirement, thereby ensuring that as many investors as possible make an active choice with their pension fund,” says McPhail.
“Insurance companies should be promoting choice, rather than simply allowing their clients to end up with second rate and inappropriate products.”
Darren Dicks, head of annuity propositions at Aviva Life, adds: "The type of annuity a person chooses can impact on their standard of living for more than 30 years so it is vital that they understand as much as they can about these products before making a choice.
“We seriously recommend that people research their options via a financial adviser or an annuity provider.”
Open market option
People who have a money purchase or defined contribution pension, at retirement must use their fund (minus an optional 25% as tax-free cash) to purchase an annuity. As the annuity market is very competitive and rates differ vastly between annuity providers on a daily basis, the open market option is your right to shop around and buy the annuity from the company offering the highest rates at that time.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.