Rise of early retirement threatens pension poverty timebomb
Boris Johnson came out fighting at Prime Minister’s Questions in the Commons last week.
The besieged premier chose the jobs market as one of his battlegrounds. “We have more employees on the payroll now than before the pandemic began, and youth unemployment is at a record low,” he cheered.
The economy has indeed undergone a remarkable recovery, rebounding from the deepest recession in centuries at a pace that far outstrips the long crawl after the financial crisis.
But Johnson’s comments on youth jobs missed a crucial point: older workers are missing in action.
In the decade before Covid, the number of over-50s in the workforce boomed by more than 2.5m to a record high of more than 11m.
Longer and healthier lives, the growth of flexible working and the rise in the female state pension age all drove the increase.
The pandemic slammed the brakes on that vital source of growth for the economy.
The number of over-50s in work has dropped by 186,000. An extra 29,000 are unemployed.
Far more have simply dropped out, neither in work nor looking for it.
Had the pre-Covid trend continued, Britain would have 1.1m more workers than it does.
Most of those – 630,000, according to the Institute for Employment Studies (IES) – come from a shortfall in the number of over-50s.
The number out of work citing long-term sickness has jumped, while older workers were more likely than younger colleagues to be furloughed, potentially meaning their skills have atrophied over time, analysts suspect, making it harder to get back into work if they lose their jobs.
This lack of older workers is bad news for an economy already blighted by skills shortages.
“Fundamentally we do not have enough people in the labour market for the level of demand in the economy,” says Tony Wilson, the IES’s chief executive. “That is fuelling shortages, that is holding back growth, that is contributing to the cost of living crisis.”
It is also bad for the over-50s’ finances, missing out on higher incomes now and on savings contributions for their later years.
Baroness Altmann, a former minister turned pensions campaigner, says age discrimination can make it hard for older workers to get new jobs, while retirement can be a “shock” for those used to the routines of work.
“I don’t think, for the long-term health of the economy and pensioners, that this is a move in a good direction. It is a dangerous development,” she says.
Early retirees could regret foregoing income and pension savings in the longer-term, she warns: “You have to look further out. They will be permanently poorer for the next 20 or 30 years of life.”
For those tempted to exit the workforce early, the road to retirement can be paved with pitfalls. Even those with sizeable pension pots risk running out of money decades before they die.
The average pension for someone approaching retirement sits just above £91,000, according to the Investing and Saving Alliance. It can be unlocked from the age of 55.
However, retirees who dip into their £91,000 that age to take £15,000 per year would run out of money within 12 years, assuming their investments grew by 4pc annually.
In this scenario a 67-year-old retiree would have already emptied their nest egg, barely sustaining them past state pension age at 66, according to analysis by stockbroker AJ Bell. However, delaying retirement by another decade would see the retiree through to age 83, with an income of £15,000.
Even a much bigger savings pot of £200,000 would only last 20 years if a 55-year-old took out £15,000 a year. If they waited until the age of 65 instead, the pension would last until they were 100.
Laura Suter, of AJ Bell, says: “Anyone thinking of retiring early needs to think about the impact it’s going to have on their pension and on the lifestyle they can afford before they hand in their notice.
“Retiring even five years earlier can have a dramatic impact on how long your pension pot lasts, meaning that you’ll either need to find money from elsewhere to fund the rest of your retirement or significantly change the amount you take from your pension each year.”
In reality, a retiree needs to have £790,724 set aside to comfortably stop working at 55 without the risk of running out too soon, according to wealth manager Brewin Dolphin.
“For many the appeal of retiring earlier is that you’re younger and therefore able to enjoy doing more, such as travelling, socialising or hobbies. However, these come with a price tag and you could find that funding a more active life coupled with retiring early means you leave yourself with very little to live on when you’re older,” says Suter.
Britons have increasingly tapped into their home to fund early retirement.
Decades of house price growth have spurred older homeowners to withdraw thousands of pounds from the value of their properties. Falling interest rates for equity release mortgages have made it easier to do so.
A record £4.4bn was released from homes last year, according to Key, an equity release adviser. The amount withdrawn by individual borrowers surged too, reaching an average of £104,792 per household last year, almost 40pc higher than pre-pandemic levels.
Yet equity release is not without its risks. The compounded way in which interest is charged on these types of loans means debts mount much more quickly than on a traditional mortgage.
Equity release plans can also trigger family disagreements and disadvantage younger generations, especially when taken out without relatives being aware of the consequences.
Stephen Timms, chairman of the Commons work and pensions committee, said it is crucial that those looking at retirement options take advice, recommending the free Pension Wise service.
“It is well worth doing to talk through what the options are – the worst thing which can happen is that they get scammed out of their pension savings altogether. That has been a real problem since the pension freedoms began in 2015,” he says.
Better still, getting more people back into work could ease their problems more sustainably: “I would certainly hope employers will be looking to older people to help fill these vacancies. There is a very big opportunity, and a huge need.”