Decision Citizens Exploring the Retirement Challenges Facing Future Generations Beatrice Male & Marie-Lise Tassoni 18 January 2018
Agenda Introduction Are future generations adequately prepared for retirement? Your future, your responsibility Enrolment is not the same as engagement Make your money work harder You can’t predict the future but you can protect it Challenging times It’s not all about income 2
Introduction Royal London asked Milliman to bring to life the challenges future generations of retirees are likely to face both financially and socially 16 case study households How will they fare in retirement? Case studies to look at how things could be different Over half of our households Over 3/4 of our households would be reliant on the state would have to reduce pension to cover their basic spending when they reach costs retirement 1. https://www.zurich.co.uk/en/about-us/customer-news/industry-news/2015/britons-likely-to-outlive-savings-as-two-thirds-underestimate-longevity 3
Meet the households Manageable Comfortable Limited Choices Squeezed 30 William Gavin and Kirsty Tomasz Charlotte Christopher and 40 Jenny Gareth and Hayley Jason and Paula Joanna 50 Phil, Angela (Callum Rajesh, Manjit (Nikhil Anthony Gordon and Yvonne & Natasha) & Nisha) 60 Victor, June (Glyn & Elaine Vincent and Lynne Martin and Janet Samantha) 4
Gavin and Kirsty’s journey to retirement Gavin and Kirsty’s household income and expenditure during their working lives 120,000 Nominal Income and Expenditure (£) 100,000 80,000 60,000 40,000 20,000 - 30 35 40 45 50 55 60 65 Age Rent/Mortgage Essential Spending Non-essential spending 5 Childcare Costs One-off costs Net Household Income
The analytical approach Will I have enough? V ALUES AT R ETIREMENT I NCOME : S PENDING IN R ETIREMENT : R ETIREMENT OF : N ON - ESSENTIAL SPENDING Property F ROM P ENSION Pension Fund F UND E SSENTIAL SPENDING F ROM STATE Personal Savings H OUSING COSTS PENSION 6
The analytical approach Gavin and Kirsty's annual net retirement income and expenditure (in today's We’ll have money) to cut back on our non- essential spending £9,700 £22,100 £16,000 £9,800 Retirement income Expenditure State pension Pension income Essential expenditure Non-essential expenditure 7
The analytical approach Jenny's net retirement income and expenditure I won’t have (in today's money) enough to cover my £4,500 basic costs! £9,500 £2,500 £8,000 £4,800 Retirement income Expenditure State pension Pension income Housing Costs Essential expenditure Non-essential expenditure 8
Key assumptions We have assumed that financial performance reflects current market views Households’ current composition, salaries, pension fund and personal savings levels are based on FSS Experian data We model future spending and savings habits based on the current spending and saving habits reported in ONS data The conversion of at-retirement pension savings into an income is consistent with projected interest rates based on today Tax and state benefits are assumed to increase in line with inflation 9
Agenda Introduction Are future generations adequately prepared for retirement? Your future, your responsibility Enrolment is not the same as engagement Make your money work harder You can’t predict the future but you can protect it Challenging times It’s not all about income 10
Are future generations adequately prepared for retirement? Comparing Retirement Income to Expenditure (in Today's Money, per retiree in the household) £50,000 £45,000 £40,000 £35,000 £30,000 £25,000 £20,000 £15,000 £10,000 £5,000 £0 11
Are future generations adequately prepared for retirement? 98% Proportion of net retirement income made up by state pension 100% Half of the example 90% households wouldn’t 80% be able to cover their 70% basic costs without the state pension 60% 50% 40% 30% On average across our 17% households, the state 20% pension represents 10% 53% of households’ 0% net retirement income 12
If left until retirement, there are three main options available to change financial situation Working longer Cutting down on spending in retirement Downsizing / equity release 13
Working longer To cover their basic costs in retirement, Other households need to work anywhere our poorest households aged 30 and 40 up to 11 years full time in order will both need to work for an extra to maintain their pre-retirement level of 7 years full time expenditure But working longer won’t be possible for everyone. 14
Cutting down on spending in retirement Spare Money to spend on non essentials each week in retirement (in today's money, per household) £196 £154 £131 £256 per week £98 (average UK household £54 spend on non-essentials) £2 (ONS family spending, 2016) 30_Limited 30_Squeezed 40_Limited 40_Squeezed 50_Limited 50_Squeezed 60_Limited 60_Squeezed -£73 -£81 15
Downsizing: the right ‘move’ for everyone? Around 3 million people of working age in the UK plan to sell their primary residence to fund their retirement 1 Certain challenges may get in the way of realising this Income generated from downsizing may not be high enough Royal London Policy Paper 6- The ‘Downsizing Delusion’ 1. 16
Downsizing: the right ‘move’ for everyone? Victor and June's income and expenditure (in today's money) £1,300 Fact File – Victor, June (Glyn & £300 £300 Samantha) (60 limited) £8,400 Age now: 60 Household salary now: £20,000 Age at retirement: 66 £16,000 £16,000 Home: They live with their adult children in £10,700 their modest home, worth £100,000, which has a paid- off mortgage. For them, it is ‘all about the home’ Wealth: They have very limited pension and Retirement income if Retirement income if Expenditure other savings. Money is tight but they get by. they do not downsize they downsize State pension Pension income Income from downsizing Housing Costs Essential expenditure Non-essential expenditure 17
Agenda Introduction Are future generations adequately prepared for retirement? Your future, your responsibility Enrolment is not the same as engagement Make your money work harder You can’t predict the future but you can protect it Challenging times It’s not all about income 18
Lack of understanding the extent of personal provision needed State pension: ¾ of our 30 year olds 40% think they can can’t cover their basic unrealistic rely on it expectations costs with it State retirement age is 68 Not understanding the Retire at 64 retirement system for those under 39 Assume parents’ DB DC generation rules will Pensions freedoms apply Lack of financial 2% interest rate on = ??? literacy £100 Misunderstanding Expect to live to 81 Life expectancy is 86 longevity (men) / 79 (women) (men) / 89 (women) 1. 40% of people in their 30s think they will rely on state pension - Royal London: Pensions Through the Ages 2. http://www.thisismoney.co.uk/money/pensions/article-3326936/British-workers-expect-retire-four-years-state-pension-age-20k-year.html 19 3. https://www.moneyadviceservice.org.uk/en/corporate/four-out-of-10-adults-are-not-in-control-of-their-finances-new-strategy-launched-to-improve-uks-financial-capability 4. http://www.thisismoney.co.uk/money/pensions/article-2598791/Four-five-underestimate-long-theyre-likely-live.html
Agenda Introduction Are future generations adequately prepared for retirement? Your future, your responsibility Enrolment is not the same as engagement Make your money work harder You can’t predict the future but you can protect it Challenging times It’s not all about income 20
Auto-enrolment has boosted pensions saving 10 million workers newly saving / saving more 1 Requires an active decision to opt-out 1 in 10 opt-out rate 2 Self-employed workers / those with multiple part-time jobs could be left behind 4.6 million self- employed individuals haven’t benefitted from auto -enrolment 1 Applies only to ‘qualifying income’ It is a step in the right direction but not the whole answer 1. Department of Work and Pensions (2016), Workplace pensions: Update of analysis on Automatic Enrolment Institute of Actuaries (2015), ‘Saving for retirement’ policy briefing 2. 21
Auto-enrolment: opting out Gavin and Kirsty's net retirement income and expenditure (in Fact File – Gavin and Kirsty (30 squeezed) today's money) Stretch limited disposable income sometimes use credit cards/loans (Non-state) pension Age now: 30 income £9,700 £22,100 Household salary now: £35,000 decreases £3,000 Age at retirement: 70 by over 2/3 Home: Own a property worth £120,000 Personal life: Both Gavin and Kirsty work and their £16,000 £16,000 two young children are looked after by an au-pair and by £9,800 family. Retirement income if Retirement income if Expenditure they stay enrolled they opt-out at 5% They opt out once employee contributions State pension Pension income fully phase to 5%, and then opt back in 15 Housing Costs Essential expenditure years before retirement Non-essential expenditure 22
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