Retirement, the times they are a‑changin’

They are called the sand­wich gen­er­a­tion. These are peo­ple in their 40s and 50s who are sup­port­ing retired par­ents while simul­ta­ne­ous­ly help­ing their own chil­dren. It’s a dou­ble wham­my, as par­ents live longer than ever before, and the chil­dren often stay in edu­ca­tion until their ear­ly to mid-20s, then need assis­tance with a mort­gage. And there may be anoth­er tier as their chil­dren have chil­dren.

“You are increas­ing­ly find­ing four gen­er­a­tions liv­ing under one roof,” says Alexan­dra Loy­don of wealth man­age­ment advi­so­ry St. James’s Place. “The demo­graph­ic changes are pro­found. The sand­wich gen­er­a­tion are try­ing to gen­er­ate a pen­sion pot while sup­port­ing their fam­i­lies, which makes it hard­er to accu­mu­late a suf­fi­cient amount.

“Worse, this is a time of major change to pen­sions and retire­ment. In par­tic­u­lar, the rules have changed over how much mon­ey you can put into a pen­sion. It adds up to a sit­u­a­tion where many peo­ple are find­ing their orig­i­nal plans aren’t going to work.”

Research¹ by St. James’s Place reveals the scale of the demo­graph­ic changes. Just 7 per cent of today’s retirees sup­port some­one oth­er than their part­ner, yet a quar­ter of those who aren’t retired expect to be pay­ing for oth­er peo­ple. The num­ber of fam­i­lies with more than one retired gen­er­a­tion is set to dou­ble to 1.2 mil­lion by 2039.

The prospect of an inher­i­tance to com­pen­sate for being sand­wiched is dimin­ish­ing. Retirees are liv­ing longer, shrink­ing their estates. The research sug­gests the aver­age inher­i­tance is set to drop by more than £50,000 among wealth­i­er fam­i­lies as a result.

Those who don’t take the right action could suf­fer. “Many peo­ple assumed they could retire at 55 and would live to 75,” says Mrs Loy­don. “Cur­rent trends sug­gest that both of these dates are like­ly to be wrong. It is essen­tial peo­ple rethink their plan­ning.”

When should you retire?

Nat­u­ral­ly, effi­cient pen­sion plan­ning requires esti­mat­ing the age of retire­ment. Tra­di­tion­al­ly the two con­cepts are the same: you retire at the same moment you take a pen­sion. But in recent years that con­cept has been unpicked. Work­ers now are encour­aged to stay in the work­force past the pen­sion­able age, if they want to.

Claire Trott, head of pen­sions strat­e­gy at St. James’s Place, says there are three rea­sons to keep work­ing.

“Retire­ment can be trau­mat­ic. It’s tough to go from work­ing five days to work­ing no days. It makes more sense to slow­ly scale down, to say three days. There is research to show it’s bet­ter for your health. The longer you work, the longer your brain stays healthy.

There is the finan­cial con­sid­er­a­tion. You may be able to keep pay­ing into your pen­sion or ISA, rather than with­draw­ing. This means you’ll poten­tial­ly have more when you need it.”

For­mer pen­sions min­is­ter Baroness Ros Alt­mann is a vocal cam­paign­er on this issue. She wants British work­ers to under­stand that the retire­ment age and pen­sion age are inde­pen­dent con­cepts. She says there are three ben­e­fits to work­ing past the pen­sion age.

First, the work­er con­tin­ues to pay into a pen­sion pot, swelling it. There are inher­i­tance tax advan­tages too, by leav­ing the pen­sion pot untouched for as long as pos­si­ble. Sec­ond, is the social aspect. Age UK² esti­mates there are 1.2 mil­lion lone­ly retirees, many of whom wish they still worked. If they did they’d be hap­pi­er and health­i­er. And third, delayed retire­ment would help the econ­o­my. By 2022 there will be 700,000 few­er 16 to 49-year olds in the UK and 3.7 mil­lion more cit­i­zens between 50 and the state pen­sion age³.

The Nation­al Insti­tute of Eco­nom­ic and Social Research pre­dicts that if British work­ers stayed in work for just three years longer the econ­o­my would be grow­ing 3.5 per cent faster a year by 2033.³ The Roy­al Col­lege of Radi­ol­o­gists says 40 per cent of its con­sul­tants will retire over the next ten years. It is plead­ing with them to work longer.⁴

Every individual’s case is unique. And the sit­u­a­tion may change over time. Many sand­wich gen­er­a­tion indi­vid­u­als are dis­cov­er­ing this, as their dual sup­port for retired par­ents and chil­dren makes it hard­er to accu­mu­late a decent pen­sion. Delay­ing retire­ment age may be part of the solu­tion.

“We have ripped up the rule book.” says Mrs Trott. “The con­sis­tent theme is that pen­sion and retire­ment plan­ning is about allow­ing peo­ple to do what is right for them.”

How to opti­mise your phil­an­thropy

Anoth­er fac­tor com­pli­cates the pic­ture. Many peo­ple in the UK want to sup­port a char­i­ty. Gen­er­ous indi­vid­u­als use sur­plus cash for phil­an­thropy. But it can be tricky to sup­port both a char­i­ty and oth­er gen­er­a­tions in the best way. Mem­bers of the sand­wich gen­er­a­tion may be using their income and cap­i­tal incor­rect­ly.

“It’s about being tax effi­cient,” says Mrs Loy­don. “It may seem obvi­ous to donate sur­plus income to char­i­ty. The char­i­ty can claim gift aid so get an uplift and the donor claims income tax relief. So, it’s a pop­u­lar strat­e­gy. But when peo­ple come to us for finan­cial advice, we take a look at their wider pic­ture. It may make more sense to change the way they give to char­i­ty and how they pass on wealth to their chil­dren.”

She explains a more advan­ta­geous approach: “For exam­ple, if a per­son cur­rent­ly gives sur­plus income to char­i­ty and plans to give cap­i­tal to their chil­dren, we sug­gest they switch it around. Use the cap­i­tal to sup­port a char­i­ty and income to sup­port chil­dren.

“The rea­son is inher­i­tance tax (IHT) laws. If you give a rel­a­tive­ly low amount to a child, you’ve got to live for sev­en years to avoid tax. Die with­in sev­en years, and the val­ue of your gift is sub­ject to IHT on a slid­ing scale up to 40 per cent. But by using the cap­i­tal to sup­port your favourite char­i­ty and income to sup­port your chil­dren, you ben­e­fit from the sur­plus income exemp­tion. It’s tax effi­cient. But most peo­ple don’t know about it.”

Val­ue of expert advice

Ulti­mate­ly, indi­vid­u­als of all gen­er­a­tions are encour­aged to seek expert finan­cial advice. “It’s impor­tant the advice pro­vid­ed is holis­tic,” says Mrs Loy­don. “This means talk­ing to an advi­so­ry able to pro­vide a breadth of exper­tise around more than pure­ly invest­ments, but tax and wills for exam­ple.”

Advice will illu­mi­nate all fac­tors, from retire­ment age and pen­sion pro­vi­sion, to inher­i­tance plan­ning and the best way to offer ongo­ing sup­port to mul­ti­ple gen­er­a­tions. Research¹ by St. James’s Place found 79 per cent of those who receive ongo­ing face-to-face advice believe they have suf­fi­cient funds to ful­fil their retire­ment plans, com­pared with 35 per cent who don’t receive advice.

The pen­sions and retire­ment land­scape is chang­ing fast. But those who seek expert advice will be well placed to opti­mise their strat­e­gy and enjoy the future no mat­ter what it holds.

The val­ue of an invest­ment with St. James’s Place will be direct­ly linked to the per­for­mance of the funds select­ed and may fall as well as rise. You may get back less than you invest­ed.

The lev­els and bases of tax­a­tion, and reliefs from tax­a­tion, can change at any time. The val­ue of any tax relief depends on indi­vid­ual cir­cum­stances.

Advice relat­ing to a Will or cer­tain areas of tax, would neces­si­tate the refer­ral to a ser­vice that is sep­a­rate and dis­tinct from those offered by St. James’s Place. Advice in this area is not reg­u­lat­ed by the Finan­cial Con­duct Author­i­ty.

Search SJP Retire­ment or vis­it www.sjp.co.uk/retirement to find out more.

¹ The Chang­ing Face of Retire­ment, inde­pen­dent­ly under­tak­en by Opini­um on behalf of St. James’s Place, April 2019

²  Age UK, August 2017

³ A New Vision for Old­er Work­ers, Depart­ment of Works and Pen­sions, March 2015

⁴ UK Work­force Cen­sus 2018 Report, The Roy­al Col­lege of Radi­ol­o­gists

St. James’s Place Rep­re­sen­ta­tives rep­re­sent only St. James’s Place Wealth Man­age­ment plc, which is autho­rised and reg­u­lat­ed by the Finan­cial Con­duct Author­i­ty.  Reg­is­tered in Eng­land Num­ber 4113955