A report released about the sources of pensioner income in the UK shows that from next year, the state will cease to provide the majority of retirement income.
The Pru-Datamonitor report shows that in 2006, state benefits will account for less than 50% of the average pensioner income. Today, 51p of the average pensioner pound comes from state benefits. By 2013 it is forecast that it will fall to just 44p in every pound.
Its a far cry from the Old Age Pensions Act set up in 1908 by Lloyd Georges Liberal government and father of the welfare state, Sir William Beveridge. More recently, its a very different story to 1979 when State benefits accounted for nearly two-thirds of the average pensioner income.
Ali Crossley, director for Lifetime Mortgages at Pru UK, says: This is a significant moment for retirement provision in the UK. We are fast approaching the point in time when the state ceases to provide the majority of UK retirement income and the onus of retirement funding will pass to the individual.
As state benefits make up a smaller proportion of the average pensioner pound in the future, other sources of retirement income will grow. Increasingly people are looking at a retirement plan, rather than just a pension.
A retirement plan can encompass many different income sources. In the immediate future, a pension, either occupational or private, is likely to form the bedrock of most peoples retirement plans, but in the future other forms of saving will also come to the fore. These other forms of saving include investments and property. People may even plan to work longer, past the normal retirement age, to generate the extra income they need.
Today occupational pension schemes account for 27 pence in every pensioner pound and this is not set to change significantly over the next ten years. However, the characteristics of occupational pensions will change as the UK moves from predominantly final salary schemes to defined contribution schemes.
Gone are the days when you sign up for a company pension scheme and sit back for 45 years. Now people are more likely to change jobs, hence want to take their pension scheme with them. Defined contribution schemes are more flexible and allow people to move easily between jobs. They also encourage people to take more responsibility for their own retirement.
In 2003/4 private pensions accounted for just 3 pence in every pound. In 2013/4 it is forecast to increase to 4.5 pence in every pound. Investments will increase from 9 pence in 2003/4 to 10.5 pence in every pound in 2013/4.
People will increasingly turn to other income sources including property. In 2003/4 other income sources accounted for just 1 pence in every pound, but by 2013 this is estimated to have trebled to 3 pence in every pound. People may also be faced with the need to go back to work post-retirement. In retirement earnings are forecast to increase from 9 pence in every pound in 2003/4 to 11 pence in every pound in 2013/14.
Crossley adds: For people working today, the days of sitting back and relying on the state to fund the majority of your retirement income are gone. The onus of retirement funding will pass to the individual. Today pensioners already receive 49 pence of every pound from sources other than the state and in ten years time that proportion will have grown.
The key to taking responsibility is planning ahead. We need to decide on the retirement lifestyle we want and we need to think about how we will fund it. We cant rely on get rich quick schemes or on a lottery win. Instead we need to make a sensible judgement about how much to save and what other assets we can rely on. Its likely to be a combination of an occupational pension, private pension, savings and investments and property.
I think property will become increasingly important, especially for pensioners approaching retirement. We know that 18 million people already do plan to use their home to help fund their retirement. The most common ways of doing this are through downsizing or using a lifetime mortgage.
People need to think about how much they need and when. Those who plan to downsize must be careful as the costs of moving can eat significantly into equity. And those who plan to use a lifetime mortgage should think about how much they want to drawdown and whether it will be at the beginning, middle or nearing the end of their retirement. They may find that they are better off taking a flexible plan rather than a single lump sum.
The Prus lifetime mortgage the Prudential property value release plan is one of the ways people can release the equity from their property in retirement. The product went live for new business last month. It is one of the only open-ended drawdown products on the lifetime mortgage market. It offers a high degree of flexibility, the option of an increasing loan to value, and the potential savings associated with a flexible loan. The interest rate is 6.45%.