Richard Hughes, chief executive of Brooks Macdonald International, says that the rising cost of living means that mindsets around preparing for retirement need to change
THE impact of rising interest rates and a sustained increase in the cost of living on our day-to-day lives has really hit home in 2023. The cost of living rose a further 10.4% this February and is taking a toll on everyone’s budgets, from the daily shop and energy bills to holidays and eating out.
The impact on those in retirement, who are relying on savings and their existing pension pot, is particularly marked.
Estimates now suggest that maintaining a minimum standard of living in retirement costs £12,800 per year – up almost £2,000 a year, from £10,900 last year. For a comfortable retirement, meanwhile, that rises to £37,300 per year – up by £3,700 (Pensions and Lifetime Savings Association). If you do the maths, that means that, to achieve that income, you will need a pension pot of around £645,000.
Research from last year suggests, however, that the majority of people in the UK – some 63% – are not saving anywhere near enough for their retirement (People’s Pension). For Gen X individuals, that rises to 68%, while for millennials, the figure stands at 76%.
At the same time, we are seeing an increasingly ageing population that is due to be more and more of a burden on the public purse.
While these are UK figures, the principle applies equally in the Channel Islands and we are seeing the repercussions of this being played out in the islands now in a number of ways.
The first is around an evolving individual approach to financial planning.
The reality is that we are now in an era of new norms where borrowing money is not as cheap as it was, things feel more expensive and saving money, which has perhaps been unthinkable in the previous low-interest-rate environment, has become a real part of our financial planning.
Against this backdrop, our mindset as a society has to change. We have an opportunity right now to take back control of our finances and think about planning for our financial future, whatever the entry level might be.
Forward planning when it comes to long-term saving and investing has become critical, and that requires a cultural shift in outlook and behaviour. And starting sooner rather than later – because of the magic of compound rates of return – can make a dramatic difference in the amount that can be saved by the time it comes to retirement.
The second area of particular interest in the Channel Islands is around workplace pensions. Those working at larger employers in the islands are likely to have workplace pensions in place already but a lot of people, particularly those working for small businesses, may not have the same pension opportunities.
The indications are that this is changing.
In Guernsey, for example, the States approved proposals for the establishment of a ‘secondary pension policy’ in 2020 which will create a requirement for occupational pensions to be offered to most employed people. In March, it was announced that mandatory contributions into employee pension pots would begin for employers in Guernsey and Alderney from July 2024 – a date that was put back from the original implementation date of January 2024 to give businesses time to prepare for the change.
Once in force, it will mean that employers may have a legal duty to enrol their employees automatically into a new secondary pension scheme or another qualifying scheme.
Jersey is expected to follow suit in due course. Ministerial plans in Jersey have set out a commitment to developing a ‘framework for a statutory workplace pensions scheme’ with a view to helping financial wellbeing in old age.
Again, the expectation is that those plans will require all businesses in Jersey to set up a pension scheme for staff, and that both employee and employer will be legally required to contribute to a scheme that will provide an additional source of income in retirement.
These moves could be quite a shift for some employers.
With these developments on the horizon and with the arrival of an interest-rate and cost-of-living environment that feels very different from what we were used to, the time to think about taking control of financial planning is now.
It is in our own interests and it is in the interests of our communities in the longer term. Taking responsibility for our long-term financial planning through savings and investments now not only means we will be better prepared for our own individual retirements but it also means we are helping to take some of the pressure off the public purse and infrastructure in the future.
At the same time, it is incumbent on the wealth and financial planning professionals in the islands to provide the guidance, expertise and solutions needed. By doing so, we can both empower individuals to better understand their financial planning goals and enable employers, who are faced with new pension rules, to make sure they are adequately prepared.
