Is this the end of retirement?

If the scaremongering is true, the pensions crisis means most of us are going to have to keep working until we drop. So is retirement as we know it really set to become a thing of the past?

It"s a stark and scary reality that, with the pension age increasing and millions having inadequate provision, many of today"s workers will have to keep going into their 70s. And even when they do decide to call it a day, they may well struggle to get by. 

Look at any personal finance website or the money pages of any newspaper and it"s a story that comes up time and time again - and no one seems to be offering much of a solution.  

Professor David Blake, Director of the Pensions Institute, confirms the gloomy outlook. "People won"t be able to retire when they planned or hoped to. They will have to work much longer before they can afford to retire and will claim a lot in benefits if they can," he says.

This is ostensibly because of a "pensions gap" - individuals not saving enough into their private pensions to provide for a comfortable old age. Estimates on the size of the shortfall vary, but are in the region of a staggering £9trn-£10trn.

Such a huge figure is hard to get your head around, but the Office of National Statistics, in a survey held between 2012 and 2014, found that the median UK pension saving was only £7,500. This figure includes younger adults.

Working on the assumption that when you retire you"ll need around £100,000 to generate £5,000 of income a year, £7,500 would deliver you a yearly income of only around £375. Not good, unless you thrive on a diet of white bread and baked beans. Indeed, according to Martyn Dorey, Managing Director of Dorey Financial Modelling, the bare minimum yearly income you"d need to maintain financial independence is £12,000 (including state benefits). 

Even those with pension savings barely have enough, according to savings and investment product providers association TISA. It estimates that the average UK pension pot currently stands at £28,000, whereas £230,000 is needed for a worker to retire on two-thirds of their income. In the Channel Islands, the figure is estimated to be only slightly better, with an average pension pot in the region of £50,000 in Jersey.

Pension pain

The gap has been worsened by demographic changes, with people living longer in retirement, lower gilt yields and poorly performing investments. In addition, the government is increasingly pushing the burden of paying for retirement onto the individual. 

Those relying on the state pension to augment paltry private pension savings also need to recalculate, as the age of retirement is set to steadily increase to 67 between 2026 and 2028 in the UK. 

In Jersey it will hit 67 by 2031, according to Martin Healey, Pension Manager at Vantage, and it is already planned to increase to 70 in Guernsey by 2049.

Thereafter, it could go much higher. As Tom McPhail, Head of Retirement Policy at Hargreaves Lansdown, explains: "We fully expect state pension ages to go up faster than currently planned, and those joining the workforce today are likely to find themselves waiting until their mid-70s to get a payout from the state system. This is simply a function of the big jumps we continue to see in life expectancy, which the state pension can"t hope to support without costs spiralling out of control."

It"s a worrying state of affairs and Robert Gardner, co-CEO of investment consultancy Redington, warned back in October 2015 that while currently one in six pensioners in the UK (1.8m people) live in poverty, if we as a society fail to address the issue of the savings gap, it could increase to as much as five in six by 2065.

Whether the pension freedoms introduced in the UK in April 2015 (but which don"t apply in the Channel Islands) have improved matters is a moot point. Many small pots have been cashed in early - £2bn was withdrawn by those aged under 65 in the first six months after the reforms, according the Association of British Insurers. In addition, with far less demand for annuities, annuity rates have fallen. 

Nevertheless, Danny Cox, a Chartered Financial Planner at Hargreaves Lansdown, says: "We"ve seen a big increase in amounts going into our SIPP pensions as a result of the pension freedoms and threats to reduce tax relief from the government."

For those who are unsure whether pensions are necessarily the best vehicle for retirement savings, Cox is in no doubt. "If you"re going to access the funds after 55 years of age, the tax benefits of pensions are compelling." This is because pensions offer tax relief on the money you pay in, as well as your returns.

Aside from private pensions, which come in two forms - workplace and personal - many people in the UK also use Individual Savings Accounts (ISAs), which offer a more flexible way of saving. National Savings & Investments (NS&I) also offers tax-efficient accounts.

The recent financial market volatility has made some people nervous about investing for retirement, as that is where most funds end up. For those anxious about excessive fund charges and the risks of investing on the markets, Dorey advises: "Anyone saving for their pension needs to understand both the potential risks to that investment and the costs."

Critical analysis

While saving for old age undoubtedly makes good sense, it"s important to look critically at the way the pensions debate has been framed. Does the "unaffordability" premise mask a lack of imagination? Isn"t "work till you drop" a wrong-headed solution to the problem of affordability?  

Alasdair Cavalla, Senior Economist for the Centre for Economics and Business Research, stresses: "Here, we should be thinking of growth. Whether provision is private or public, available resources depend on the size of the economy. And problems such as the divergence between pensioners" and working people"s incomes become much less acute when everyone"s enjoying pay rises." 

He believes increased growth and taxes could help solve the pensions dilemma for citizens. Indeed, as a society we can collectively shape the system to suit us, irrespective of age. 

Guardian columnist Owen Jones also argues that technology offers us the possibility to radically reduce the working week. "To make this work, the social security system needs a dramatic overhaul. Basic income - where we"re all given a payment from the state as a right of citizenship - should be introduced."

Such a move could be a novel way to have the best of all worlds, benefiting the whole population, irrespective of age. For example, it would help free up parents from the nightmare of trying to resolve the work/life dilemma without descending into poverty. Pensioners, who wished, could also find suitable part-time work to augment generous state provision.

Indeed, working part-time in retirement can be a positive, as a spokesperson for AgeUK confirms. "There are many positives to working longer. Working part-time is, for many people, a great way to make a gradual transition to retirement, as it allows them to maintain all the social and health benefits that a good job can bring, while continuing earning money. 

"The number of over-65s in work has increased steadily during the past 20 years and is now over 1.2 million - more than 10 per cent of that age group. Increasing numbers are also moving on to new part-time roles, often through self-employment, where they may be able to turn a hobby or a personal interest into paid work."

If we have the vision and determination to confront the direction in which we"re heading, retirement could still be a positive for young and old alike. Otherwise, we really will have to work until we drop.