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Average life expectancy here in the UK has been slowly rising. The rate of increase reached its highest between 1998 and 2008, when it varied between an increase of 0.32% and 0.33% per annum. Since then, the rate of rise has steadily fallen. Between 2019 and 2023, it has dropped to 0.15%. The current life expectancy is 81.77 years.
One reason for the turndown was the COVID-19 pandemic. In 2020 it was responsible for more than 95,000 deaths. But even with the height of the pandemic now well behind us, COVID is still causing fatalities, with around 38,000 in 2022.
Although it is still too early to extrapolate the effect of the COVID pandemic, over the next 50 years, statistics indicate that by 2070, the average life expectancy for a man will be 85.2 years, and for a woman, 88.1 years.
The challenges facing the individual in terms of ensuring financial comfort during retirement are considerable. So too are those facing the businesses working within the retirement market, for it is they who must provide the financial solutions that will enable people to achieve their goals.
Fully Funded Pensions Promises in the UK
Pensions account for a higher proportion of UK household wealth than housing. As a country, we are well ahead of other nations in terms of fully funded pension promises.
Regarding pension assets as a percentage of GDP, the UK’s assets are 120% of GDP. This compares to Germany with only 8%, France with 12%, and Japan with 31%. Only the USA outperforms us in the area with 174%. These figures are taken from the OECD (Organisation for Economic Co-operation and Development). Funded DB pension plans hold approximately £2 trillion, while DC pension plans hold a further £213 billion.
The Changes Significantly Affecting the Retirement Market
The UK savings market and the retirement sector, in particular, is slowly but irrevocably changing. One of the biggest megatrends are demographic shifts, encompassing an increasingly ageing population, a dramatic increase in immigration rates, the shrinking of the future workforce, and changing consumer preferences. The demographic and social megatrend exerts its influence and all other megatrends.
For the first time in recorded history, the workforce in developed countries is shrinking. It puts more strain on a decreasing PSR – the potential support ratio, measuring the number of 20 to 64-year-olds supporting 65+ year-olds.
Spending power is also shifting as a result of the ageing population, and this, combined with recent regulatory changes such as pension freedoms, is another factor in the changing face of the retirement market.
Also, as consumers are becoming aware of the options open to them and taking the rising cost of living into account, many investors are looking for ways to create passive income to support them in their retirement.
Solutions Open to the UK Government and Business World
The UK government has responded by changing pension regulatory requirements, such as extending the state pension age from 66 to 67 by 2028. The next change to 68 isn’t due to be phased in until 2044 to 2046, but there is a growing swell of opinion this may have to be changed during the 2030s.
In the meantime, in his spring budget, Chancellor Jeremy Hunt has made specific regulatory changes to pensions – scrapping the lifetime allowance, increasing the annual allowance from £40K to £60K, increasing the taper allowance from £240K to £260K and the money purchase allowance from £4K to £10K.
How Employers Are Adapting
Employers, too, have had to make changes to deal with the increased cost of providing pensions for the changing shape of the workforce. Defined benefit pensions are a thing of the past excepting specific industries such as the NHS. The norm is now the defined contribution pension which allows more flexibility in response to changing consumer preferences.
Some employers now offer flexible retirement schemes, allowing staff to phase their retirement over a number of years.
How Wealth Specialist Companies Are Adapting
Financial advisors and wealth management specialists have also had to respond to the changing marketplace and have done so through technological advancements using Cloud technology and AI.
The lockdown during the height of the pandemic also played a part. People forced to stay indoors had more time on their hands and used it to carry out research into things like digital platforms offering financial retirement products, which led to an increased demand for private pensions, annuities, and long-term care insurance.
To make things easier and cheaper for investors, many wealth management companies introduced robo-advisors to their platforms. It has simplified investing, making it available to the public, irrespective of age.
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