Changes in state pension age is one of the most easily comprehendible aspects of the coalition government’s pension system overhaul. Possibly, that is why it is one of the most criticised .
Before April 2010, women in the UK could begin receiving their state pension at age 60 and men at 65 but state pension ages are changing. A gradual reform proposes to bring the retirement age for both men and women up to 66 by the April 2020. The exact implications of the pension age reform for individuals will vary depending on current age.
In addition to speeding up the pension age hike, the coalition government is looking into embedding a pension age increase mechanism linked to life expectancy. In his March 2011 Budget, Chancellor George Osborne said he hoped to see a more automatic process for increasing the pension age and will therefore bring forward plans to review this process, potentially encompassing regular independent reviews of longevity changes. While this proposition is not novel, the potential for it to materialise in a public policy change has spurred ample debate.
The Financial Benefits of Working Longer
For people at the end of their active working years the prospect of putting off retirement and working longer might seem like an unpleasant last-resort scenario. But Morningstar's Director of Personal Finance, Christine Benz, explained in a recent interview that when you add up all the benefits of working longer, monetary and otherwise, the trade-off between enjoying a longer retirement and enjoying a more comfortable retirement begins to look attractive.
This idea is certainly worth delving into as pension gap statistics, both in the UK and the US, suggest that for some individuals working longer may not be a choice, but a necessity. In the autumn of 2010, pension provider Aviva estimated that on average a UK citizen might need to save £10,000 per year over their working life in order to retire comfortably. Although the exact figure will vary wildly depending on each individual’s circumstances, there is no question that there is a sizeable gap between average current pension savings and expectations for income in retirement.
Addressing the worrisome pension gaps statistics, Benz highlights some of the important benefits of extending one’s retirement age. The obvious benefit is that of more income and more spending money. Working longer also gives your retirement savings a longer period of time to compound.
Benz points to a T. Rowe Price study which showed that people who delay retirement by just three years can pick up a 22% increase in their income during retirement, assuming that during those three years they continue to save 15% of their pay cheque in their retirement accounts. “It's even more impactful if you're willing to wait a little bit longer,” Benz said. Waiting five years more before retiring could lead to a 39% increase in in-retirement income, the study shows, again assuming that you continue to fund those retirement plans at a rate of 15%.
The benefits of working longer are even greater if you are paying into a company pension plan that includes an employer match (or part-match) of your pension contributions. From October 2012, UK employees will be auto-enrolled in such schemes and should thereby stand to benefit from employer pension contributions unless they opt out of the plan.
The Lifestyle Benefits of Working Longer
In addition to these significant financial benefits of working a little bit longer, Benz points out that the upside of delaying retirement could be more than the tangible monetary benefits. She believes delaying retirement can be a potentially healthy lifestyle decision. “There have been some pretty compelling studies,” Benz explains, “that look at physical and mental health benefits associated with working longer.” While she acknowledges that not everyone’s health permits working in old age, Benz points to a recent study that looked at 65-year-olds in and out of employment and found that the working group did better on mental acuity tests than people who had retired earlier in life. Benz is quick to clarify that there could be an element of the chicken or egg story here, given that people with greater mental acuity might be more inclined to work longer, so such studies should be taken with a pinch of salt.
Benz also believes it is important to remember that you should you opt to work longer you don't necessarily need to stay in the same job. You might be able to branch out and try something different, especially if you're in a job that you’ve been looking forward to leaving. Remaining part of the workforce after you’ve climbed the corporate ladder could be an opportunity to get creative, she suggests. “Think about doing something that you really do like,” she advises, “earning some level of income during retirement or possibly working part-time or consulting with your current employer. It doesn't have to be black or white, or on or off. It can be some combination, and I do think it's very important to do something that you enjoy and that has meaning for you.”
To Sum it All Up
All this goes to say that working longer is not necessarily as terrible as it might sound. From a financial point of view, it's one of the biggest levers that people have if they are looking at their nest egg and seeing that they're going to come up short. Further more, it can be as healthy for your intellectual vigour as it can be for your financial stability, and an opportunity to delve into that career path which building a family and a savings account prevented you from exploring.
