retirement

Women’s risks greater than men’s

22 December, 2016 By WiC

Women face significant risks across the life course.

Women earn less than men, and they are more likely to be in low paid and insecure work.
There is an unequal division of caring responsibilities, with women being more likely to be caring for children, for adults, and often both.
Women face distinct health risks, and they are more likely to report having suffered from mental health conditions.
Women are more at risk from domestic abuse, including domestic violence and financial coercion.
Women live longer than men, but they tend to have far lower levels of pension savings.
Women require care for a longer period at the end of life, and they face considerably higher care costs as a result.

A new interim report published by The Chartered Insurance Institute presents a snapshot of women’s and men’s risks in life in Britain today, and their resilience to shocks and preparedness for later life.

It is not focused on specific insurance or financial products or services. Rather, it takes a holistic view of life risks in society today, and seeks to glean a better understanding of women’s risks and their exposures. By doing so, it highlights the potential scope for the insurance profession to play a greater role in protecting women, and society as a whole.

As an interim report, it focuses on the key highlights, but recognises that further in-depth analysis, possibly including primary research, may be necessary to clarify and better understand the issues identified. The key findings of women’s risks in life are summarised under three broad headings in section

Risk & Work – Education, work and pay

Risk & Relationships – Family, relationships and care

Risk & Wellbeing – Health, wellbeing and ageing.

The report also highlights women’s potential risk exposure, which is measured with reference to their financial resilience – that is, the ability to withstand the impact of risk. The main components of resilience considered are: access to savings, pension savings, assets (excluding property), stable income and absence of debt.

Finally, the Report considers Attitudes and approach to risk, among both women and men.

[Words: taken from the Report]

Download the Report

For more Reports on Gender, Diversity and allied subjects, visit our searchable Knowledge Bank.

The great divide

19 October, 2016 By WiC

Britain’s intergenerational divide deepens as young adults look set to be worse off in retirement than their predecessors.

The vote to leave Europe perhaps captured the nation’s fractured mindset perfectly. Relatively few young adults voted for something that could ultimately deny them an automatic right to live and work in the EU. Moreover, their collective viewpoint stood in stark contrast to that of older generations, for whom issues of identity seemed to trump economic concerns.

Generational divides were once drawn along cultural and social lines. Baby boomers seemed to go against everything their parents had believed, in terms of music, fashion and philosophy. But nowadays the divide between old and young is just as likely to be denoted by expectations of wealth and prosperity.

Today’s 18–21-year-olds enter the workforce at a time of austerity, soaring house prices, student debt, and low wage growth. Even on optimistic scenarios it looks likely that they will make much slower progress on pay than their predecessors, challenging the notion that each generation will do better than the last.

Fair isles?

Recent research from the Resolution Foundation has found that a typical millennial1 earns £8,000 less during their twenties than those in the preceding generation – Generation X.2 Without real-term wage growth, a significant number of millennials have all but given up the idea of ever owning their own home. This is a particular source of discontent, especially as their own parents bought the family home relatively cheaply, and then locked in sizeable gains.

Meanwhile, older generations continue to see their retirement incomes rising. Prudential says that people planning to retire in 2016 expect to have an average income of £17,700 a year, the highest figure it has ever recorded.3

Indeed, perhaps nowhere is the generational divide more apparent than in the prospects for retirement. Younger workers are much less likely to have access to final salary schemes, and the starkly different contribution rates for those schemes compared with defined contribution pensions have obvious implications for the share of wealth across generations.

To compound the problem, ‘twentysomethings’ are starting their careers at a time when their pay is being supressed by firms plugging deficits in their final salary schemes that, in the main, protect benefits for older workers. This means less investment capital to help businesses grow, and less money available to invest in the pensions of younger workers.

Reality check

According to research from insurer Aegon, those aged 16 to 24 are hoping to retire with an average annual income of £64,000 a year, nearly six times the average income they are on track for. This aspiration comes despite the fact this would require a savings pot of nearly £1.9 million, a sum significantly greater than the pension lifetime allowance.4

Such expectations would be more realistic if more young savers were willing to take on investment risk, but in separate research from Scottish Widows, a staggering 51% of 18–29-year-olds believe cash savings will help support them, despite the experience of an ultra-low interest rate environment for much – if not all – of their adult lives.5 By saving their money rather than investing it, they could be missing out on potentially life-changing sums at retirement.

“I think younger generations understand that they could spend two to three decades in retirement, but they don’t necessarily understand the financial commitment required,” says Ian Price, Divisional Director at St. James’s Place.

Yet despite the gloomy prognosis, he believes there are reasons for optimism.

“Younger generations have very long-term investment horizons and greater opportunities to benefit from compound growth,” says Price. “Understandably it’s hard when you’re trying to get on the housing ladder, or pay off student debt, but investing into your pension early and often could make a huge difference by the time you reach retirement.”

The government hopes to plug the pensions gap through automatic enrolment – a scheme that places workers over the age of 22 and earning more than £10,000 into a workplace pension scheme by default. Although minimum contributions are currently a long way from being able to provide for a comfortable retirement, auto-enrolment should lead to better engagement with retirement planning.

Aside from the government’s efforts to tackle the issue of falling pension scheme membership, some families are starting to consider how to use their combined resources in the best, most tax-efficient way to benefit younger members. This may be to help them gain a foothold on the housing ladder, clear debts, or build a pension. But with the right advice and planning, transferring wealth to the next generation can be extremely rewarding in all these cases, offering simple ways reduce a future Inheritance Tax liability.

“We must ensure that younger generations are getting a fair share of the proceeds of economic growth so that we don’t end up with a society where the retiring population is poorer than the generation that went before,” adds Price.

To receive a complimentary guide to wealth management, retirement planning or Inheritance Tax planning contact Sophie-Jane Keelaghan on 07970 299980 or email sophie-jane.keelaghan@sjpp.co.uk

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested. The levels and bases of taxation and reliefs from taxation can change at any time and are generally dependent on individual circumstances.

Representing only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products.

1 There is no agreed standard on which years of birth fall into the ‘millenial’ category, but a 2016 report by Goldman Sachs defines millenials as those born between 1980 and 2000: http://www.goldmansachs.com/our-thinking/pages/millennials/

2 Stagnation Generation: the case for renewing the intergenerational contract, Resolution Foundation, July 2016

3 ‘Class of 2016’, Prudential, 15 January 2016

4 Aegon.co.uk, 5 August 2015

5 Retirement Report 2016, Scottish Widows, September 2016

DC Universe – it’s not about outer space

6 June, 2016 By WiC

The ageing of populations around the globe is causing an acceleration in the shift to Defined Contribution pensions.

We all know, because we’re often reminded, that we are living longer. A greying society is not just a trend in the UK, however; it is a global phenomenon. According to the UN’s medium population projections, the number of people aged over 65 will rise from just over 600 million today to close to 2.5 billion by 2100.

Furthermore, over the next century, the growth in the number of older people is expected to far outpace the rise of the working age population, as the chart below demonstrates. The UK is on a similar path.

Source: World Economic Forum

Dramatic increases in life expectancy have a profound implication for politics and the welfare state; moreover we see many of the models designed to manage those systems start to come under pressure, or even unravel.

Workplace pensions are a case in point. Defined benefit (DB or ‘final salary’) schemes promise participants a highly predictable income in retirement, based on a formula linked to earnings and length of service. If you have a DB pension, your employer is responsible for funding the scheme and for ensuring there’s enough money to pay your pension income at the time you retire.

But the DB model has mainly relied on a broad base of young members to support fewer retired members. As the ratio of old to young gets bigger, not only does DB become more difficult to administer, it presents a significant financial risk to companies, governments, and other institutions.

Defined contribution (DC) pensions, on the other hand, require you to build a ‘pension pot’, with you and your employer putting money into your chosen investments. Unlike a final salary scheme, there are no income promises; the value of your pension pot is determined by the performance of your investments. Consequently, most of the risk is placed on your shoulders rather than those of your employer.

Off balance

Final salary schemes have long been giving way to DC-type plans as companies transfer pension liabilities off their balance sheet. In the UK, many final salary schemes have closed, and there has been growing participation in DC schemes brought about by ‘auto-enrolment’.

But the same phenomenon can be seen around the globe, as regulatory changes serve to accelerate the rate at which retirement markets converge towards DC.

Japan, for example, has one of the fastest-ageing populations in the world. It has a long history of DB pension plans, but the government is legislating to expand coverage of its DC scheme nationwide.

In the US, the move from DB to DC has been happening for several decades. In 1980, of those private sector workers who were in a workplace pension scheme, 60% were only covered by a DB scheme. But by 2006 that had fallen to just 6%2. Stricter funding requirements imposed by government have often been used to defend the closure of many schemes.

Great expectations

So how does the move from DB to DC affect people in the UK? Put simply, the government now expects much more from individuals in terms of having the expertise to manage their own retirement planning affairs.

You are expected to translate the value of your pension into income terms and make appropriate investment decisions; you must ensure you have saved enough to maintain your lifestyle over an unknown period, and you must understand costs in retirement to avoid an income shortfall.

Admittedly, a minority of people enjoy making such decisions, but the reality is that most of us don’t know how to manage all of the risks described above. New rules introduced last year, which give people the freedom to do what they like with a pension from age 55 onwards, only serve to increase the possibility of them making a mistake.

Building a pension pot and drawing an income from it requires you to manage a combination of risks, and demands a different mindset. In the past, individuals retiring with a final salary pension or annuity have generally only needed financial advice at the point of retirement. Going forward, those retiring with a DC pension will need to take financial advice not just up to that milestone, but throughout their retirement.

To receive a complimentary guide to wealth management, retirement planning or Inheritance Tax planning contact Sophie-Jane Keelaghan on 07970 299980 or email sophie-jane.keelaghan@sjpp.co.uk

1 World Economic Forum, 2 October 2015

2 Handbook of Aging and the Social Sciences, 2011