Schrodinger’s Retirement

Hugh Nolan

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So apparently we’re all living longer than ever before and the Government’s solution to keep State pensions affordable is to make everyone retire later.  That’s all well and good if your job is easy and you can keep doing it until you’re 67 or 70 (so MPs and Scheme Actuaries will be fine, thankyou very much) but it’s not so practical in many occupations where the physical demands are much higher.  In fact, recent research reveals that 12% of people within five years of State Pension Age are too ill or disabled to work.  According to the TUC’s report “Postponing the pension: are we all working longer?”, only half of people aged 60 to 64 are economically active.  The half that aren’t earning does include the lucky folk who have been able to choose to take early retirement but it also includes those who have been made redundant or are unable to find a job, as well as those too sick, so it’s a safe bet to say that far more than one in eight people in this age range are unable to work.

The average figures also hide some worrying variations.  Workers in Northern Ireland have a one in four chance of being physically unable to work through to State Pension Age and one in three manual workers who become economically inactive before retirement cite ill-health as the reason (double the rate of some white collar professions). It may well be that some white collar workers have their ill-health eased by generous retirement terms but the outlook isn’t bright for a blue collar worker who is too ill to work and has to wait for a few more years to draw a State pension, especially given the strong possibility of having only modest occupational pension savings to fall back on.

In the brave new world of “Freedom and Choice” for Defined Contribution (DC) schemes, people who are too sick to work through to full retirement may end up drawing down most or all of their pension savings to tide them over until the State pension does kick in.  The same fate awaits others who can’t work for other reasons, such as redundancy or caring responsibilities.  Many older people will increasingly be forced to carry on part time work to help make ends meet, which again may suit those with an option to do light consultancy work rather better than those stacking supermarket shelves for minimum wage (even if John McDonnell gets elected and makes it £10 per hour).  Retirement will become less well-defined as people cope with this harsh reality and Schrodinger’s famous cat is simple by comparison, with only two possible states rather than the multiple categories of semi-retirement that will doubtless develop.

What can we do about all this?  As always, the answer is largely to save enough money to cushion sickness problems and provide for a decent retirement, irrespective of when the State says you can draw your pension.  There are other lessons to be learned though, including the need to design investment strategies in pension schemes (especially DC schemes) to be flexible on retirement plans.  No-one knows for sure when they’ll need to retire so we can set up schemes to protect people against a drop in their fund value just before they are unexpectedly forced out of the workplace through illness, redundancy or any other personal circumstances.  Not everyone needs this extra protection but those who do often need it badly.

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