A financial health check in your 40s or 50s could significantly improve your chances of a comfortable retirement.
Retirement is increasingly seen as a long journey to look forward to, not, as it once was, a relatively short period of life that spelt the end of the road. Today’s retirees are more busy, independent and curious than ever and have more time to settle into a life filled with endless possibilities.
But at a time when so much about retirement is improving, there is a cloud being cast: worry about how to afford the retirement we want. Many of us can expect to spend close to a third of our life in retirement, but without a long-term plan, we run the risk of outliving our financial security.
Progressive increases in the State Pension age, along with the ever-shifting goalposts on pension taxation and allowances, mean that some of us will find it more difficult to realise our retirement ambitions. And the fact that a defined contribution pension pot can be taken in a variety of different ways only serves to make the decision on how, and when, to retire even more complex. When is the best time to take our pension; and do we take it all, or just part of it? When should we access our tax-free entitlement?
These are the sort of questions which we will usually need to answer in our 60s or early 70s. Yet, many of us would benefit from examining our choices much earlier in life.
Financial planning should address a range of issues, such as how long we are prepared to keep working for, our predicted life expectancy, our State Pension entitlement, how much income our savings need to provide, and how much money we want to pass on to loved ones. We may also need to consider how much to have in reserve that could be used to pay for care.
Yet there is no natural trigger point during our working lives which encourages us to think about these issues, meaning that many of us will end up leaving it too late.
According to Michelle Cracknell, Chief Executive of The Pensions Advisory Service, there needs to be a much better way of supporting people in their mid-40s to mid-50s through an intervention intended ‘to reflect the fact that your retirement income is now your responsibility’.
Andrew Seager, Head of Service Development at Citizens Advice, says the key to increasing early engagement is to get people talking about pensions as a social norm, ‘like having a baby or starting work’.
Both support the introduction of a midlife MOT, under which individuals would review their financial health at an age when it was still possible to take reparative action such as increasing pension contributions.
This idea has gained prominence since it was recommended by John Cridland’s Independent Review of the State Pension age: Smoothing the transition, which was published last year. The report highlighted that a midlife MOT facilitated by employers and government could be a useful trigger to encourage people to take stock and make realistic choices about work, health and retirement.
‘The majority of online careers advice we have observed is targeted at young people, which is often not directly transferable to older people. As a first step, an online Mid-Life MOT could allow people to consider their existing plans, as well as provide signposting and guidance on where to get more help,’ says the report.
Cridland, who is a former director general of the Confederation of British Industry, proposes that this guidance is connected to financial advice.
“Once you have made up your mind on how you are going to spend your time and where, then you need financial advice,” he said. “I want to combine the two. I think this could be done with a diagnostic tool on the internet, quite a sophisticated one, that helps you through the decision-making tree and then connects you with advice.”
While details of the initiative are still to be finalised, some employers are already responding to the recommendations. Aviva has announced it will be rolling out its midlife MOT service to employees aged 45 or over in 2019. Meanwhile, Legal & General, The Pension Advisory Service and Mercer have launched their own pilots.
John Cridland’s report shines a light on the importance of engaging with retirement planning early. However, he agrees that, with the right interventions, there is scope to change behaviour. Your 40s and 50s is a time of life when you need to look under the bonnet, see what you’re spending your money on, and see if your retirement plans are on track. Getting the right information at the right time can help to unlock conversations about retirement and gives you the opportunity to take stock of your career plans, savings and health.
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(The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances).