Month: February 2022

Many of us dream of retiring early and spending our post-working life indulging in our hobbies and passions. But since the state pension age went up from 65 to 66 between late 2018 and late 2020, employment rates among 65-year-olds have reached record highs.

According to a report from the Institute for Fiscal Studies (IFS), the increase in employment among this age group since the change was implemented is as big as the one that occurred between 2005 and 2017.

Laurence O’Brien, a Research Economist at the IFS, described the increase as “striking”, so why exactly is this happening?

The IFS data suggests that the sharp increase in employment among 65-year-olds is being largely driven by people in less affluent areas, and those who have lower levels of education.

Indeed, figures show that since the state pension age went up, the employment rate among 65-year-old men rose by 10% in the most deprived areas of the UK, compared with 5% in the most prosperous areas.

Similarly, in the most deprived places, the women’s employment rate at age 65 went up by 13%, compared with 4% in the most well-off places.

This suggests that without a state pension, people living in less affluent parts of the country wouldn’t be able to afford to retire, or at least enjoy the kind of lifestyle in retirement that they’d wish to have.

It also points to a lack of financial education in these locations, with many lacking not only the means, but also the knowledge of how to prepare their finances for retirement in advance.

Another point to stress is that the effects of the state pension increase on men and women have not been the same.

Since the change was made, an extra 7% of 65-year-old men have stayed in paid work, compared with 9% of women in this age group.

While the report applies a broad brush to large numbers of people, it is clear that socio-economic and demographic factors are continuing to have a profound impact on the life decisions people feel able to take across the UK.

However, there was a ray of light in the IFS report, with figures showing that most people who decide to delay retirement since the increase in the state pension age are likely to be financially better off.

The report notes that these people would only need to work about 20 hours a week at the National Living Wage to compensate for losing their state pension income, and most 65-year-olds are earning more than this every week.

But crucially, it states that they also miss out on the many benefits of retirement, such as enjoying lots of leisure time, as a result of working for longer.

Figures showed that 65-year-olds are working 1.8 million hours a week extra since the state pension age was increased – a measure of just how much precious time they’re missing out on because they’re still working.

As many of our clients will be aware, one of the great worries as the world recovers from the pandemic is inflation. Late last year the Bank of England suggested that inflation ‘might reach’ 5% in 2022. A week later the figures for November came out showing that inflation had already reached 5.1%.

The UK is not alone. In Germany inflation reached 5.2%, the highest figures since 1992, while in the US it hit 6.8% – a level not seen for 40 years.

Traditionally, one of the principal tools used to counter inflation is interest rates – and in December the Bank of England responded to the inflationary pressure by raising rates to 0.25%. It is, though, a delicate balancing act – at roughly the same time as the Bank was raising rates, figures were released showing that the UK economy had grown by just 0.1% in October last year, with growth for the third quarter of the year revised down to 1.1% from the previous figure of 1.3%.

With supply chain problems continuing, economic recovery from the pandemic is going to be unpredictable and difficult – and it will not be helped by rising interest rates. But neither will it be helped by rising inflation, which also erodes the real value of clients’ savings.

So what will happen to interest rates in the next 12 months? Some pundits are forecasting that inflation in the UK could well reach 6% before it starts to stabilise, so we may see gradual rate rises through the coming year – after all, December’s rise was the first time rates have risen in over three years.

This approach is likely to be mirrored elsewhere: in the US, for example, the consensus now seems to be that there will be two or three increases in interest rates next year, as the Federal Reserve looks to keep inflation under control.

The question is whether those increases in interest rates will be reflected in better rates for savers? The more sceptical among our clients will expect a repeat of what nearly always seems to happen. Mortgage rates rising almost immediately: rates on savings rising slowly, if at all.

It is important, therefore, that clients keep a sharp eye on their savings, and on the interest rates they are receiving. Inflation of 6% set against an interest rate of say, 0.25% (or lower, in many cases) will very quickly erode the value of savings held on deposit. It goes without saying that we are always here if you need any help or advice on savings rates, or any other aspect of your financial planning, and that we will always check the savings rates our clients are receiving as part of our regular review process.

The minimum pension age for accessing workplace and personal retirement savings is set to go up from 55 to 57 in 2028 – a change that could have a big impact on people’s retirement planning decisions.

But a new study has found that less than one in five people in their 40s are actually aware of this upcoming change.

Figures from the Pensions Management Institute (PMI) also show that just four per cent of people in their 40s actually know that the current minimum age for accessing private pensions is 55.

So what does this mean? Firstly, the findings suggest that many people in their 40s lack basic knowledge about the pensions rules, and secondly, that many could be caught out when they turn 55 and find that they can’t access their private pensions.

As the PMI warns, many people seeking to draw benefits as soon as they can “may be shocked to learn that they will have to wait”.

To make the situation even more complicated is the fact that the changes won’t apply to everyone.

The PMI points out that members of some private sector schemes and those who are paying into public service pension plans will continue to have a pension age of 55 after 2028.

Responding to the PMI’s concerns, a government spokesperson said the change in the normal minimum pension age to 57 was announced in 2014.

This, they said, was 14 years in advance of the change and “gave people time to make financial plans”.

However, it is clear that a significant proportion of the general public are not aware of this major change in pensions policy, whichI President of the PMI Lesley Alexander believes is “particularly worrying”.

“It is vital that the general public understands clearly what their retirement choices are,” she said.

The PMI has called on the government to launch a new communication programme as a matter of urgency, so the situation is clearly explained to the wider public.

Ms Alexander added that this needs to happen before the pensions dashboard, giving people the facility to view all their pension savings in one place, is introduced in 2023.

Otherwise, she believes there will be widespread confusion “when people learn that they will become eligible to draw benefits at different ages”.

The government has described the introduction of the pensions dashboard as a step that will revolutionise how consumers keep track of their pension information, as it will put the saver “more in control” and transform “how they think and plan for their retirement”.

However, the widespread lack of awareness of upcoming changes to pension policy suggests a problem is looming, and points to why it’s so important to get financial advice from an experienced, qualified specialist who is closely following regulatory and policy changes.