What can future generations expect from retirement?

The landscape of people’s wealth is changing. Today’s retirees still have generous pension provision, and plenty of accumulated housing wealth to fall back on. But for future generations, sources of wealth are fracturing. The next set of retirees will have more anaemic and disparate pension provision, less certain inheritance, less housing wealth. They are likely to work longer to fill the gaps. Advisers will need to knit these income sources together effectively in coherent and agile retirement options.

A key change from one generation to the next is more varied employment. Rather than a job for life, or at least a decade or two, the workplace is more fluid. People will often combine periods of self-employment, entrepreneurship, education and employment. This may be intellectually enriching, but it plays havoc with pension provision.

It often leaves investors with multiple pensions from different organisations, alongside a smorgasbord of personal pensions, ISAs and other savings options. This can be difficult to manage: investors may find themselves with multiple pots, managed in disparate ways, over or under-diversified. It may be difficult to judge whether the overall portfolio suits their long-term risk/reward profile.

There may be other unfortunate consequences: research from Hargreaves Lansdown shows that 23% of savers believe they have lost track of a pension¹. The number of unclaimed pensions has risen by over a third (37%) to nearly £27bn since 2018².

Weaker pension provision

The next generation of retirees have been caught between two pension regimes. By and large, they have missed out on defined benefit regimes unless they are public service workers. The vast majority of private company schemes have long been closed to new employees.

However, they are also too old to have benefited from auto-enrolment early on in their careers, with all the compounding advantages that may have brought. Auto-enrolment began in 2012, and now comprises at least 8% of an employees’ salary³. For workers in their twenties, this is likely to set them up well, but it has come too late to make a meaningful difference for older generations.

That said, the next generation will still have housing wealth. Although the boomers have been the strongest beneficiaries of rising house prices, the next wave of retirees will still have benefited. Those who bought houses in 2005 would still have seen a near-70% increase in the value of their home⁴. It creates a situation where property owners may be increasingly asset rich and cash poor at retirement.

Working longer

The first line of defence for many aspiring retirees is to work longer. The Institute for Fiscal Studies (IFS) has found that patterns of employment among people in their 50s and 60s are dramatically different to those seen a few decades ago. In particular, employment rates among women aged 60–65 are significantly higher (around 25 percentage points higher than in 1995)⁵. In 1975, over half of men left paid work between the ages of 62 and 66, whereas now just three in 10 men leave paid work over the same ages.

The pandemic has created some anomalies in the statistics that are yet to coalesce into a clear picture, but overall, this trend seems likely to continue. The workplace is more flexible and more accommodative of older workers. It is notable that many people working beyond state pension age are either self-employed or working fewer than 16 hours per week⁶.

The IFS adds: “First, each successive generation approaches retirement with greater labour market attachment, work experience over their lives, and education than their predecessors…We would expect these patterns in general to keep people in work for longer, pushing up employment rates. Second, the state pension age is rising from 66 to 67 between 2026 and 2028. Given the strong rises in employment for 65 year olds seen as a result of the recent increase in the state pension age from 65 to 66, it would be surprising if this did not act to push up employment further.”

The end of the sole breadwinner

Another consideration is that the sole breadwinner household is not necessarily the norm. The percentage of UK households in which the female partner earns more than the male partner has steadily risen from 19.8% in 2004 to 23.3% in 2019⁷. This means many households will have two pension pots to draw on, but it may create complexity for advisers. Those pots may have been managed in different ways and each party may have a different approach to managing their wealth.

There are other elements that also mark the next generation of retirees from this one, which will create complexity for advisers in building retirement income solutions: mortgages are extending into retirement, for example, so advisers may need to factor ongoing mortgage and maintenance expenses into cash flow projections. The next generation’s parents are living longer, which means they may not receive a timely inheritance to boost their retirement plans, and may also have caring responsibilities.

Retirement strategies need to evolve

There is no one solution that solves the problem. In our report ‘Life Beyond Work: The Changing Face of Retirement’, 56% of advisers astutely say that flexibility would grow more important over the next three years⁸. Equally, many believe there is a need for providers to step up. One adviser comments: “There’s a gap in innovative solutions, able to blend the guarantees of annuities with the adjustable income benefits of drawdown.” That’s going to be a problem for the next generation of retirees, who will need agility.

Pairing annuities with drawdown, using packaged provider solutions, or using protection overlays could all be part of the solution. Cash flow planning will become even more important, creating personalised projections to reassure clients by demonstrating how choices influence outcomes.

Either way, an acceptance that retirement has become more complex is a starting point, while a forensic understanding of client priorities will be crucial in determining the right balance. Retirement strategies will need to evolve.

1 Source: Pensions Age, October 2023.

2 Pensions Policy Institute. Briefing Note 134 – Lost Pensions 2022: What’s the scale and impact? 27 October 2022

3 Source: 26 October 2022, Ten years of Automatic Enrolment in Workplace Pensions: statistics and analysis

4 Source: Nationwide Building Society, UK House Price Data, as at Q3 2023.

5 Source: IFS, June 2022.

6 Source: IFS, November 2023.

7 Source: Hargreaves Lansdown, September 2023.

8 Source: Research conducted by NMG Consulting for BNY Mellon IM between June and July 2023, based on responses to an online survey with 202 retirement-focused financial advisers. Question: How do you think clients' financial needs for retirement might change in importance over the next 1 to 3 years?

Important information.

For Professional Clients only. Any views and opinions are those of the author, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes.

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