Pension scene now offers freedom over when to retire
Staying at work past the former conventional retirement age is now becoming the norm. In the past, retirement ages were set by the prospects of reaching pension age. Twenty years ago, the pension set within the national insurance scheme was usually linked to an age of 65 for men and 60 for women. Gradually the formal retirement age for men and women is being aligned and a higher retirement age for the state-funded old age pension has been set.
Critically, there is a growing discretionary gap between the age when people qualify for the Government old age pension and the decisions of individuals on when to change from conventional employment to full retirement or other options such as part-time employment.
The gap between pension age and actual retirement is also being influenced by the changing employment practice which removes from employment contracts a pre-set age related date for the end of a contract of continuing employment.
As an artificial manipulation of employment conditions, it remains to be seen whether inventive employers will develop new forms of fixed-term contract which reduce the open-ended nature of contracts with no formal age limitation.
Employers now face the difficult problem that any effort to anticipate the retirement of employees in a conversation raises possible difficulties if the employee suspects that the employer is trying to give an older employee 'something of a push'.
The labour market in Northern Ireland has been changing quite noticeably for older workers. Twenty years ago in 1995, the proportion of the population between the ages of 50 and 64 who were economically active (in the labour force) was just under 56%. Ten years ago this ratio had not changed significantly and was just over 56%.
Coming up to date, the change is dramatic. In 2013 and 2014, the proportion in this age group in the labour force was just over 64%.
This represents an increase of over 8% in the number of people working between the ages of 50 and 64.
Although the numbers are smaller, the same personal choice of remaining actively in the labour force is evident for people aged 65 and over.
An economically active ratio of 6.7% 10 and 20 years ago has risen to 8.7% in 2014. Proportionately, this is an increase of nearly 30%.
Of course, for people over the age of 65, 91 in every 100 are out of the active labour force. However, 10 years ago over 93 in every 100 had effectively left active employment. The trend is clear, although the impact is much larger in the age group 50 to 64.
Perhaps the biggest change affecting planning for retirement has been the decision to allow pension fund holders to draw on their accumulated funds with greater personal discretion. Gone will be the requirement for a pension to be taken with the constraints of an annuity.
The new flexibility in the use of pension funds must also be seen in the context of the decrease in the number of defined benefit pension schemes outside the public sector.
Defined benefit schemes have proved difficult to manage as investment returns on funds have not kept pace with the commitments made and pension fund providers have closed many such pension schemes.
The switch, in different ways, to defined contribution pension schemes transfers a major new (and larger) responsibility to individuals and away from employers. What is not usually fully appreciated is that an acceptable pension on retirement probably calls for a contribution of up to (or above) 20% of payroll costs. Putting this on individual employees is necessary but not necessarily persuasive.
The changing employment and pensions scene has given individuals more discretion on when to retire and how to finance retirement. These are difficult changes to manage and call for personal planning many decades before they actual retirement. That lesson has not been widely understood.