Daily Express – Celebrate the Bonus Years

by Dr. Ros Altmann

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Great news. The Department for Work and Pensions has just released figures highlighting that millions of us can expect much longer lives. They say one in three girls and one in four boys born today will live to 100! All the money we have spent on medical advances, healthcare and improving lifestyles is having brilliant results.

But this fantastic news is usually followed by fears of a pensions crisis, as the realities of rising life expectancy seem to have by-passed our pensions and retirement systems. The same old attitudes to working lives are hampering proper preparations for older ages.

The Government says living longer means we must all save more. Of course that would help, but it will simply not be enough to guarantee decent later life lifestyles. Just increasing savings will not be sufficient to solve the pensions crisis.

Firstly, many of today’s workers have high borrowings, so they cannot save much, if anything. Secondly, students increasingly start work with large debts, which hampers their ability and willingness to save. So, just expecting people to save enough in future for a traditional pension and retirement is simply not realistic. Once student debts are repaid, workers who want to retire in their sixties are likely to have had at most about 30 years of savings, which cannot realistically or reliably fund a decent income for another 30 years later on. Thirdly, the Government’s plans to automatically enrol workers into pension schemes from 2012 will only require up to 8% of salary to go into the pension fund. This is not enough to provide a long-lasting generous pension income.

So what can we do to prepare properly for longer life?

We must rethink retirement, which actually means rethinking our whole life plan. At the moment, we generally expect three phases of our lives. Firstly, studying when young, secondly, working full-time until around our mid-sixties, and thirdly, retiring – stopping work altogether to enjoy leisure, travel and rest.

This is the social norm, however if people have not been able to save much, or their investments have not done well, what will they live on? Many of today’s retirees, without a good employer final salary-type pension, find they cannot afford the lifestyle they want because their pension savings, hit by poor investment returns and annuity rates, have not delivered the promised income levels.

So, we have to rethink pensions too. The traditional concept of pension income is money that people will live on when they stop work. This can come from the State, from an employer or from private savings. The state pension is funded by current taxpayers. Past national insurance contributions were used to pay pensions to yesterday’s pensioners, so it is people still working or paying taxes and national insurance who pay for today’s state pensions. With more older people live longer, working taxpayers will struggle to keep paying those who have stopped. Of course, the Government wants to improve the state pension, but it can only realistically provide a basic income for everyone – helping to avoid poverty but not as much as most people would like.

In the past, employer pension schemes stepped in to fill the gap between our very low state pension and what pensioners needed for a better lifestyle. But, as more pensioners keep living longer, employers have pulled out of these types of ‘guaranteed’ pensions because they cannot afford to keep increasing the amounts they pay each year. New-style workplace pension funds – and private pension plans – do not guarantee any particular pension amount, leaving millions exposed to investment and annuity risks – and high charges. Anyone without very high levels of saving is in danger of having inadequate future income for the lifestyle they aspire to.

There could be a better way forward.

There is a whole new phase of life waiting for future generations (and for today’s workers too) – a phase of ‘bonus years’, where people work perhaps 2 or 3 days a week, having 4 or 5 days a week free, adjusting working hours to their capabilities, preferences and needs as they get older. This would mean more money coming into the economy and more money to give older generations better lifestyles. Instead of just the three life phases we have now – studying, working, retiring – future life plans could have four: studying, then working full-time, then the new bonus years of working reduced time, and then retiring.

Retirement would be like a set of clothes, one set or outfit does not fit all. We should be encouraged to select our older-age lifestyle plan in the same way we choose our style of dress: something that suits us, which we can afford and in which we feel comfortable.

Of course employers will have to change their attitudes too. This is starting to happen and the abolition of the Default Retirement Age is an excellent first step, but far more is needed.

These changes cannot happen overnight – it will take time to plan for them and employers as well as individuals will need help in seeing the opportunities offered by flexible working in later life.

But, if we don’t adjust our lives, millions will be too poor to afford a decent old age, unable to enjoy their later years and will not have enough to spend to keep the economy afloat either! People are not old at 60 or 65 any more, but they can cut back from full-time work, just working some of the time, while giving themselves and everyone else a better life.

We cannot solve the pensions crisis with the same old thinking – a radical new future awaits us, let’s embrace it.