What to do with a problem like Maria?

" Deferring retirement for three to six months was the equivalent of paying an additional 1% of earnings into a pension for 30 years. "

Maria was one of the first to be auto-enrolled into a workplace pension in 2013. She earns just under £20k a year and expects to retire in 2028. By then she may have accumulated £15k in her pension. Incidentally, Maria is not unique; I recently came across a 59-year old partner in a law firm who only has £7k in their pension.

Maria has spent most of her working life ensuring she has a roof over head for her and her children, which she has done successfully. She is very proud of the home she owns, it is her own. She feels she has done well being a single mother most of her working life. She’s also proud of the fact her workplace pension is at last helping her build some savings which she can look upon as building her wealth. But how can she use that wealth?

Annuity rates are on the rise; if they reach 6% by the time she retires it will give her an income of £900 a year or £75 a month in addition to her State pension. Some would say she should take her tax-free cash of £3,750 with a monthly income of £56.25. However for her, unless she wins the lottery, it’s unlikely that on her level of income she will pay any tax. This then opens up the debate, why does she need a lump sum from her pension?

On the other hand how much extra income does she actually need? She has experienced a hard life of scrimping and saving; could she live off her State pension, in which case her workplace pension has become a reserve for one-off treats which may do more for her quality of life; basically it becomes an easy-access ISA.

So far we have overlooked another important issue. Why does she think that one Friday she needs to go to work and on the following Monday she will be retired? Would part-time work interest Maria? If she worked one year more and paid her State pension as additional contributions into her workplace pension she would increase her £15k by the amount of her State pension, additional workplace contributions and investment growth; maybe, by more than 60%. If she could see her way to deferring her pension for two years that would mean she would more than double her pension. What would that do to her annuity income and the quality of her retirement?

Incidentally, a recent paper from the National Bureau for Economic Research in America maintained that deferring retirement for three to six months was the equivalent of paying an additional 1% of earnings into a pension for 30 years.

A key issue is what Maria spends her money on and how will that change in retirement? Her mortgage repayments, whether she is still supporting any of her children, and her commuting expenses will influence the extent of her spending in retirement. Will it be much different; in fact could it be greater, as currently she cannot spend while she is at work.

It could be that she will find it very difficult to cope with a large reduction in income. If her spending cannot be reduced sufficiently, she will begin to accumulate debt. Where will she turn then? At least she owns her modest house. She is unlikely to be able to make much from downsizing unless she moves to a completely different part of the country away from her friends and relatives.
Instead of seeking to use her pension to provide a lifetime income, she may focus on making it last for a fixed period. If it could last eight years, with two year’s additional work she is now 10 years beyond her original retirement age. As she will then be 77, equity release could then offer a solution.

Finding a retirement income strategy for those with small amounts of pension saving is probably more difficult than advising those with large amounts of pension savings.

Even more difficult will be Nigel; Maria’s twin brother. He has never owned a house and has always rented. He is basically in the same position as Maria, but when he retires he will claim Housing Benefit to help with his rent and possibly Council Tax relief. If you think Maria is a problem try talking to Nigel about how he will receive value from his pension savings.

As Maria and Nigel show, there are a large number of issues that those with small pension savings should be considering when they retire. They exist now, but as auto-enrolment matures their number will increase rapidly. In that sense, they should present a strong client opportunity for advisers, especially if their complexity touches anywhere near what Maria and Nigel will have to work through.