Time to rethink your retirement options

Mar 27 2009 Personal Finance by Trevor Law

I would guess that the body clock of a 65-year-old who has spent 40 years getting up at 6am and not returning home until 6pm doesn’t switch off that easily.

The novelty of getting out of bed a few hours later in retirement very soon wears off and the monotony of the last 40 years’ “habit” soon returns.

There is an argument for individuals to be trained in retiring, possibly by gradually reducing the number of days that an individual works up to retirement and also educating them about the amount of spare time they will have.

You can mow the lawn and wash the car only so many times in a week.

A tale doing the rounds neatly sums up a potential trapdoor facing those who retire. The wife asks her husband: “What are you doing tomorrow?”

“Nothing.” was the reply

“But you did nothing yesterday,” said the wife.

“I know, but I didn’t quite finish,” replied the husband.

A select few will have choices in retirement as to what pace they live their life. This has been secured by a healthy retirement income whether it be from investments, private pension, state benefits, an inheritance or a combination of.

For a few, the recent downturn in the market and knock-on effect to annuity rates may well have deferred many people’s long-awaited retirement.

I suppose it wasn’t a cry of “help I can’t afford to retire” that the baby-boomer generation born after the Second World War ever expected to make. But this is the position many find themselves.

Many pension funds have been hit by the stock market falls and for those who thought their property would subsidise their retirement have had to think again. Market commentators have labelled this the “perfect storm” where the three main asset classes – equities, property and fixed interest – have all fallen. Nothing “perfect” about that!

At the same time annuity rates continue to fall, largely due to increased longevity although falling gilt yields are compounding the problem. We have seen some annuity providers cut their rates by 2.5 per cent.

In 1990 those retiring with a pension pot of £100,000 would have been able to buy an income of £15,600 per annum. Today the same pension fund buys less than £7,000 per annum. In a nutshell, you need twice as big a pension pot to provide the same level of income.

As the Bank of England embarks on its quantitative easing experiment – effectively printing money – people who are about to cash in their pension pots will find they are getting less money than they would have eighteen months ago.

Since the plans for quantitative easing were announced, six leading annuity providers have cut their rates by an amount that has effectively reduced income levels by two per cent per annum. So you might find yourself losing £15,000 in pension payments over a decade.

Some who are rapidly approaching retirement are suddenly aware that their pension fund isn’t able to provide the required level of income. Recent research show that 2.2 million adults, many of whom don’t expect to retire before 2012, are planning to delay their retirement as a result of the state of their pensions.

There are also some opting for running a business in preference to retirement. Almost one third of people aged 45 to 65 want to work later in life, a proportion which rises among the most wealthy.

Research by Standard Life found that one in 20 baby boomers wanted to set their own business up in retirement and have subsequently been labelled as the “olderpreneurs” who could help Britain pull out of the recession.

Those approaching retirement age are twice as likely as their parents to choose to continue working. The poll of 1,500 people born in the 20 years after the Second World War found that 29 per cent wanted to do some kind of work “on their own terms” after retirement age – a choice that had been made by only 15 per cent of their parents.

The value of experience should not be forgotten. Take those DIY stores that have made life easier for customers employing people beyond retirement age as shop assistants. If you are seeking advice on the best filler to buy to repair that annoying rotting crack in the window-sill or the best paint for that kitchen wall that you want to be able to wipe clean easily, who would you rather talk to?  A school-leaver who has probably never used a paintbrush in his or her life or someone who has spent decades sorting out those minor DIY tasks that can drive you crazy if neglected?

Take the corporate world. How often are people saying “so and so would have known what to do”, referring to the director or manager who recently retired?

For those who want to call it a day the choice of wanting to work may be more like having to work. Those who want to retire should consider shopping around for the best annuity. Consider, even, whether to buy an annuity. Fund values are showing 40 per cent losses which, along with falling annuity rates, is reducing pensions further.

When stock markets recover or inflation goes up, annuity rates usually follow. So putting off buying an annuity could pay off. Consider buying an annuity with part of your fund leaving the remainder exposed to stock markets to benefit from any recovery.  Alternatively, take the tax-free cash from your pension and live off this for a time. There will be no tax to pay and the remainder of your fund will remain invested.

* Trevor Law is a director with Montpelier Group (Europe) Ltd, the  privately-owned independent financial advisers located at Barston near Solihull. E mail: TILaw@montpeliergroup.com