By Alistair McQueen
If you ask people what their retirement age will be, a common answer is “about 60 for a woman and 65 for a man”. That’s understandable as these are the State Pension ages which were set in the early 1940s and remained unchanged for more than 50 years, becoming deeply rooted in the mindsets of society.
These mindsets, however, are out of date. Today, retirement ages vary widely. Three factors have driven this change.
1. Rising State Pension age
The State Pension continues to be the biggest source of income in retirement for most people 1. Since 2010, however, the age at which we are entitled to receive our State Pension has been changing, to reflect our rising life expectancy. A woman’s State Pension age was the first to increase. In November 2018 it matched a man’s State Pension age for the first time, at 65. The State Pension ages for men and women are now rising in tandem, and are both set to hit 68 from the year 2039 onwards. These changes affect all of us and can shape our retirement plans. You can check your State Pension age at www.yourpension.gov.uk.
2. Abolition of the default retirement age
It used to be legal for an individual’s contract of employment to be terminated just because they had reached a certain age. This is no longer the case. To challenge age discrimination, since 2011 it has been against the law to cease someone’s employment due to their age 2. This change has contributed to an increase in the number of people working into later life. There are now more than one million people over the age of 65 in work 3. We can expect this number to keep growing, and our retirement ages to keep changing, as our life expectancy keeps rising.
3. Pension freedoms
It used to be typical for most people to use their personal pension savings to purchase an annuity at retirement, to secure an income for the rest of their life. In 2015, however, the private pension rules were rewritten. We now have much greater freedom over how we can use our money at retirement. From the age of 55 we can still use our private pension savings to purchase an annuity if we wish. But we are also able to take all our private pension savings in one lump, to take some when we need to, or to take none and leave it invested for a later date. More than one million people have used the new freedoms since 2015 ,4 and this is changing our typical approach to retirement. The government provides a free service to people age 50 and over help us understand our options at retirement at www.pensionwise.gov.uk.
The significance of the “normal retirement date”
When you begin investing in a personal pension it is common for it to be set up with a specific retirement age in mind. This is sometimes called the normal, standard, or nominated retirement date. But it’s purely a guide. You are not bound by this age and date. As life changes, our retirement age and date can change too.
This normal retirement date, however could have some implications for how your private pension money is invested. If the private pension thinks you want to retire at a certain date, the pension could be programmed to move your money from higher-risk investments to lower-risk investments as this date approaches. Higher-risk investments typically carry a greater potential for higher investment returns, but they are also typically more volatile.
As we approach the date at which we want to access our investments, we may be motivated to avoid this higher volatility. In the pensions world this can be called “lifestyling” or “de-risking”. If your normal retirement date is out of date, your pensions approach to “lifestyling” or “de-risking” may also be out of date. But don’t worry, your normal retirement date can be changed. This “lifestyling” or “de-risking” can also relate to the retirement options you plan to exercise – for example, using your pension savings to purchase an annuity or taking your pension savings as cash. You may also want to check that your “lifestyling” or “de-risking” strategy, if applicable, is appropriate for your needs. Your private pension provider should be able to give you information on this.
So, in addition to understanding your State Pension age, understanding your employment rights with regards to age, and understanding your private pension freedoms from age 55, it is sensible to understand your private pension’s normal retirement date too. If you feel it’s no longer appropriate, you may wish to change it. As always, the more control we take of our pension saving plans, the more control we will are likely to have over our retirement plans too.