The population equation

In 2008, many people were surprised by the news that the UK had over 11,000 people over the age of 100. Recent predictions are even more startling, claiming that by 2033, this number will have risen to 80,000. Such a large number of people facing a retirement of 35 years or more poses several questions about planning for old age in this country.

It is yet another example of the way the population is ageing in Britain and the challenges we face as a society. It is no surprise that long-term care and how it is to be funded is an increasingly important issue on the political agenda. Within this debate is the growing realisation that with such increased life expectancy, the costs of care will have to be shared between the State and private sector.

Aneurin Bevan’s vision in 1945 of state-funded care ‘from the cradle to the grave’ now seems like a distant echo. It came at a time when the UK population was 48.6 million, and life expectancy was 65, compared with 61 million and 79 now, so clearly the playing field has altered and Bevan’s dream is no longer realistic.

David Willets’ recent book, How the Baby Boomers Took Their Children’s Future – And Why They Should Give it Back, claims that the baby boomer generation, born immediately after the war, have spent their children’s inheritance and are enjoying the benefits of rising house prices and generous final salary pensions.

It can, however, be argued that it is the previous generation, the ‘golden generation’ that preceded today’s baby boomers, that have enjoyed the most generous of pensions, with many policies linked to inflation.

Of course, the next generation coming through to retirement knows exactly where its responsibilities lie, with the emphasis returning to the individual to fund long-term care and potentially support both children and grandchildren.

This accentuates the problem of planning for a retirement that may last for thirty years or more, and working out how long your resources need to last.

Outside the box

At Hodge Lifetime, we have for many years been advocating the introduction of a comprehensive wealth statement on retirement which would, of course, include property wealth. Only with this would an individual have a starting point for planning their retirement funding.

The recent suggestion to pay a one-off premium at retirement to cover care costs, whenever they may occur, sits nicely with the wealth statement concept. A bold idea would be the inclusion of standard life expectancy data to focus minds on just how long people need to plan for.

To quote the Office of National Statistics (ONS), by 2033 the population of over 65s will have increased by 32%, and if current trends continue, the average person reaching 65 in 2033 can expect to live until they are 88.

Those approaching retirement need to be aware that this could very well apply to them, as living standards continue to rise and vast advances are made in medical technology and treatments. The gradual erosion of the value of the State Pension has heightened awareness of the problem, yet the ONS found that nearly a quarter of men aged 65 and over have no private pension provision. It is likely, however, that many of these individuals own property.

All this leads to the natural conclusion that a more holistic approach to paying for retirement is the way forward. Temporary annuities to cover income in retirement, part-time work, and partial fund withdrawal are all options to supplement a small pension.

The use of equity release to help to bridge the gap between the comfortable lifestyle people are used to and an insufficient pension pot is bound to see growth as clients plan their futures.
Indeed, it is not inconceivable that we could see a resurgence of the old home income reversion plans, where an annuity income is paid for life, which is backed and paid for by the house.

These schemes always offered clients security of tenure, but also offered the provider a tremendous hedge against longevity, which is a pertinent issue.

A government announcement of a small subsidy of these schemes would provide the incentive necessary for lenders to look again at this product area. Without doubt, people’s expectations of retirement have changed over the years with retirees now living much longer, and expecting a lifestyle which for many will be out of reach in later life.

Imaginative product design in the equity release arena will have a huge role to play in this future planning quandary, as will the trillions of pounds invested in pension schemes.

Somewhere in the middle is the answer – the next few years will be critical in the journey to dealing with these issues.

Jon King is managing director of Hodge Lifetime