BNY Mellon Investment Management head of retirement Richard Parkin assesses changes in the retirement landscape and what, according to BNY Mellon IM’s latest research, some of the implications are for financial advice.
The landscape of people’s wealth is changing. Today’s retirees still have generous pension provision, and plenty of accumulated housing wealth to fall back on. But for future generations, sources of wealth are fracturing. The next set of retirees will have more anaemic and disparate pension provision, less certain inheritance, less housing wealth. They are likely to work longer to fill the gaps. Advisers will need to knit these income sources together effectively in coherent and agile retirement options.
A key change from one generation to the next is more varied employment. Rather than a job for life, or at least a decade or two, the workplace is more fluid. People will often combine periods of self-employment, entrepreneurship, education and employment. This may be intellectually enriching, but it plays havoc with pension provision.
It often leaves investors with multiple pensions from different organisations, alongside a smorgasbord of personal pensions, ISAs and other savings options. This can be difficult to manage: investors may find themselves with multiple pots, managed in disparate ways, over or under-diversified. It may be difficult to judge whether the overall portfolio suits their long-term risk/reward profile.
There may be other unfortunate consequences: research from Hargreaves Lansdown shows that 23% of savers believe they have lost track of a pension1. The number of unclaimed pensions has risen by over a third (37%) to nearly £27bn since 20182.
Weaker pension provision
The next generation of retirees have been caught between two pension regimes. By and large, they have missed out on defined benefit regimes unless they are public service workers. The vast majority of private company schemes have long been closed to new employees.
However, they are also too old to have benefited from auto-enrolment early on in their careers, with all the compounding advantages that may have brought. Auto-enrolment began in 2012, and now comprises at least 8% of an employees’ salary3. For workers in their twenties, this is likely to set them up well, but it has come too late to make a meaningful difference for older generations.
That said, the next generation will still have housing wealth. Although the boomers have been the strongest beneficiaries of rising house prices, the next wave of retirees will still have benefited. Those who bought houses in 2005 would still have seen a near-70% increase in the value of their home4. It creates a situation where property owners may be increasingly asset rich and cash poor at retirement.
Working longer
The first line of defence for many aspiring retirees is to work longer. The Institute for Fiscal Studies (IFS) has found that patterns of employment among people in their 50s and 60s are dramatically different to those seen a few decades ago. In particular, employment rates among women aged 60–65 are significantly higher (around 25 percentage points higher than in 1995)5. In 1975, over half of men left paid work between the ages of 62 and 66, whereas now just three in 10 men leave paid work over the same ages.
