Retirement outcome modellers may need to come with warnings, one former pensions minister has said, as new research shows many people retire earlier than planned. Many wish they had saved more and started younger, but are pensions the right priority for young people?

 

More than a third (35%) of pensioners retired before age 60, but only about 31% of those said they did this because they could afford to do so, according to a quarterly survey of 4,000 nationally representative UK adults by provider LV. 

 

Most who took their pension before 60 did not expect to retire early but said something unexpected had led them to do so. A quarter retired early because of ill health, and a fifth cited stress and mental health – both reasons were more prevalent for those who retired before 60 than over 60. A considerable proportion (19%) of early retirees had been made redundant, and nearly one in 10 (9%) said they left work to care for a relative.

 

“The number of people citing unplanned events means people need to be aware that they might have less time than they thought to save,” said LV senior insights manager Kate Morris, introducing the research at a webinar organised by the International Longevity Centre UK on Monday. 

 

 

The fact so many are having to retire early raises serious questions about the modellers that people are given to predict their retirement outcomes based on current saving habits, believes Sir Steve Webb, a partner at consultancy LCP and former pensions minister. 

 

Retirement modellers typically ask users to select their chosen pension age and will base its calculations on contributions remaining the same over the time to the chosen retirement age. 

 

Sir Steve said modellers should clearly highlight the risk of involuntary early retirement and ask users a further question, "which is, ‘What if you couldn’t work up to that age, what if your health gave out five years before? How much would you have needed to save then?’ That might be a very different number.” 

 

The way in which the figures are presented should be well thought through as they can be “scary and off-putting”, he added. 

 

“But I think there is a risk if we tell everybody to just juggle on with a certain figure, and then things go wrong five, seven or 10 years out... We probably need to alert people to that more,” he said. 

 

 

Modellers typically assume that users have paid off their mortgage and also do not pay rent, he observed, but as the proportion of retirees who are still renting rises, this too will become a challenge for pension calculators. Some pensioners are already using their tax-free lump sum to pay off their mortgage, the LV research found, leaving less money for their ongoing costs. 

 

Trade body UK Finance and consultancy Accenture found half of all first-time buyers and more than a quarter of home movers who took out a mortgage in Q3 last year opted for a term of more than 30 years. The average first-time buyer was 32, according to building society Halifax, with average property values for first-time buyers roughly 7.6 times the average salary. 

 

For many in the pensions world, the answer to the risk of being short of money in old age would be to save more for a pension, and retirees appear to agree with this view. When asked what advice they would give their younger selves about pensions, they mostly said to save as much as possible, join the company pension and to put in as much as you can.  

 

However, Sir Steve was sceptical about making young people put more into pensions because of the consequences in retirement of not being a home owner. 

 

Sharing that his children are auto-enrolled, he said: “If their career progresses and they get a pay rise, could I in all conscience say to them, put that money in a pension rather than in a lifetime ISA, get a government top-up, get a deposit, get a house? Because the best retirement planning of all is not to have to fund a rent in retirement.” 

 

Having to do so could mean needing about an extra £250,000 on top of the pension pot that is already required, he noted. 

 

Sir Steve added: “I, as someone who really believes in pensions, am not convinced it’s definitely the right thing for young people beyond auto-enrolment if the alternative is potentially renting for longer.” 

 

As government and industry often send generic messages about saving, he said they should think about the potential consequences: “We have to think carefully about language and assumptions.” 

 

The debate about the competing priorities of having to fund increasingly high deposits alongside old age provision was last had in the mid-2010s, and the lifetime ISA, which aims to combine saving for a deposit and a pension, became available to consumers in 2017. In 2019-20, 545,000 people saved into a LISA. 

 

 

LV’s research showed that a lack of saving means some people plan to use the value of their home to fund their retirement. Nearly one in 10 (9%) wanted to downsize and 7% were considering it. Again, Sir Steve questioned those statements, noting that having invested time and effort into a home and built networks in a local area, “the last thing you want to do when you have the time [to enjoy it] is leave it”.  

 

Finding a suitable alternative can also be challenging, he argued, saying purpose-built retirement properties are expensive, while stamp duty and moving costs could further put people off downsizing.