16th February 2021

What do we mean by retirement?

Historically, retirement has happened at a set age (typically 60 for women and 65 for men). Most people gave up work for good and lived off a pension.

‘Pension’ is the term given to the income a person receives in retirement in place of earnings:

  • Most people receive a pension from the Government (State pension)
  • Many receive a pension from their former employer (workplace pension)
  • Some receive income from a pension they have built up themselves (personal pension)

So, what’s changed?

Pensions have become very expensive to provide. One of the reasons for this is that, broadly speaking, we are living much longer and so retirement lasts much longer. More people than ever before are working into their 60s and 70s, either by choice or necessity.

Life expectancy

Take a look at the life expectancy table below. The first figure in the 2nd and 3rd columns represent a baby’s average life expectancy at birth in the year that they were born. For example, if Joseph was born in the year 2000, he was then expected to live, on average until, the age of 76.

The figure next to it (in brackets), is the average life expectancy of Joseph now. Due to improvements in medical science and the healthier lifestyles that we all lead, the average life expectancy for Joseph now is 86!

Year of birth Male life expectancy at birth
(life expectancy now)
Female life expectancy at birth
(life expectancy now)
1960 68 (85) 74 (87)
1980 71 (85) 77 (87)
2000 76 (86) 80 (89)

Government intervention

Recently, the Government has done two things aimed at reducing the cost of providing pensions:

  1. Increasing the State Pension Age (SPA)
    • It’s unlikely that Joseph, or anyone else born in the year 2000 or later will have a SPA of under 70
  2. Auto-enrolment
    • The Government has now made it compulsory for employers to provide a workplace pension for most employees
    • Employees over a certain age and earning over a certain amount must be automatically enrolled into a workplace pension
    • Auto-enrolment means that on joining a new employer, most employees will automatically become a member of their employer’s pension scheme whether they want to or not
    • If they do not wish to remain a member, they must complete a form to opt out
    • The employer must make a contribution to the scheme
    • The employee must also make a contribution to the scheme
    • The basic premise behind auto-enrolment is that we all know that saving for a pension is a good idea, but that many of us don’t get around to doing it. By making it easier to be in a pension scheme than out of one, the Government hopes we’ll all make bigger in-roads into saving for our futures

Why do we need to be encouraged to save for our retirement?

Two of the main reasons that young people give for not saving for their retirement are that it is too far in the future for them to worry about and that they don’t have any spare cash to save.

But, by starting young, you drastically reduce the amount you need to save.

Legal & General, a financial services provider, share the following table on their website which illustrates the monthly amount that needs to be saved to achieve a pension income of £5,000 a year depending on how old you are:

Age                        25       35        45        55
Monthly cost   £269    £349   £501   £947

The table illustrates the cost of delay. The longer you put off saving for retirement, the more expensive it gets.

The counter-argument to ‘I don’t have any spare cash now’ is ‘When will you have?’.

If you don’t think you can afford to save for a pension when you’re earning, how will you afford to live once you retire and have no earnings? The State pension may well be around, but some people feel that it may not be, and if it is, it may not be as generous as it is today (about £9,110 a year if you’re entitled to the full amount). A recent study showed that the average retired household
spend was just under £22,000 a year (bbc.co.uk), so you can probably imagine just how difficult it would be to live a comfortable lifestyle on just the State pension.

What should I do?

The best time to start saving for your retirement is as soon as you’re in full time employment.

If you’re eligible for a workplace pension, both your employer and the government will add money to your pension pot.

If you work for yourself or if you don’t qualify for a workplace pension, you can save into a personal pension. The government will add money into your pension pot. Many personal pensions have a minimum contribution of £20 a month, making them affordable for most people.

With thanks to our partners over at the NMBA for content.