The Future of Retirement The power of planning UK Report
Foreword Welcome to the sixth Future of Retirement report, researched exclusively for HSBC. A lifetime of working is likely to create a strong appreciation of the value of time and how important it is to make the most of every moment. For many people retirement is something to look forward to, which they plan in anticipation of having time to do things they ve dreamed of. At HSBC, we help people to plan financially for their future, both to realise their dreams and to help them protect against the bad times which sometimes threaten. We believe it s important to ask our customers what matters to them and how they feel about the future. This is why we invest in The Future of Retirement, across 17 countries and 17,000 people. The survey findings are the real reflections of people in the UK and across the world. This report lets you see for yourself what others think and feel about their retirement. I hope it will also encourage some readers to take more control of their own financial future. The ability to shape your retirement is in your own hands with the power of planning. David Wells Head of Investments, Savings and Insurance HSBC Bank 2 The Future of Retirement
Introduction HSBC s The Future of Retirement programme is a world-leading independent study into global retirement trends. It provides authoritative insights into the key issues associated with ageing populations and increasing life expectancy around the world. The 2011 global report, The power of planning, is the sixth in the series and is based on interviews with more than 17,000 respondents in 17 countries in December 2010. This country report, based on the views of 1,042 UK respondents, explores how households in the UK are likely to respond to the rapidly changing shape of retirement over the coming decades. All data used in this country report relates to the UK unless otherwise indicated. For further global and regional comparisons, please refer to the global report. Key findings 56% of Britons see retirement as an age of freedom. Married couples are the most confident about this UK respondents are concerned about occupational pensions: 57% of those who expect to be worse off than their parents in retirement gave the reason that company pension schemes would be less generous Only 42% had heard of the new National Employment Savings Trust (NEST) which will be introduced from 2012 Men and women of all ages associate retirement with freedom, but women are on average 18% more likely to associate it with financial hardship Only 40% of households have planned financially for their future Nearly one in five people do not know what their main source of retirement income will be Those who have plans for their futures are not only better prepared financially for retirement but also feel more positive about their futures UK respondents are less likely than their global peers to have a financial plan, but they are more likely to have taken professional financial advice Those who have financial plans and have taken professional advice are the best prepared of all for the future, with 249% of the UK average level of retirement savings and investments Independent financial advisers are the most popular source of professional advice in the UK with 59% of advice-seekers consulting one; banks were the second-largest Respondents are more active online researchers than the worldwide average, with 45% in the UK using this advice source For individuals who want to take action now to improve their financial well-being later in life, there is a simple 5-step checklist based on the research 3
Retirement landscape The retirement landscape for the baby-boomer generation, which is now entering retirement, will be quite different to the one that their parents enjoyed in the past and their grandchildren will experience in the future. The United Nations Population Division reports that in the past 30 years, the process has been relatively stable with the percentage of the population aged 65 and over increasing just slightly from 14.9% in 1980 to 16.6 per cent in 2010. However, this is set to change: by 2050, 22.9% of the population is projected to be aged 65 and over. This represents a squeeze on those of working age, and on the state, to have to provide retirement income and healthcare for the ageing population. Adequate planning and preparation for retirement will become more important than ever as dependence on retirement savings grows. Figure 1: The baby-boomers enter retirement Source: United Nations Population Division, World Population Prospects, The 2008 Division 100 80 14.9 16.6 22.9 60 % 40 64.1 66.0 60.7 20 0 21.0 17.4 16.4 1980 2010 2050 Aged Aged 0-14 0-14 Aged Aged 15-64 15-64 Aged Aged 65+ 65+ 4 The Future of Retirement
The changing shape of retirement Faced with the universal challenge of funding an ageing society, Britons remain upbeat in their perception of retirement. Nearly half (48%) see retirement as a new chapter in life, and 56% associate retirement with freedom. When considering what constitutes a happy retirement, 70% said not having to worry about money and 56% see good financial planning as extremely important. 38% associate retirement with financial hardship, but this peaks with women (49%), singles (40%) and the cohabiting (49%). Married Britons appear more secure, with only a third (34%) thinking old age will bring financial hardship and 42% seeing it as a time of happiness. Figure 2: How people perceive retirement 28% 22% 9% 11% 48% 33% An opportunity for a whole new chapter in life A continuation of my current lifestyle An opportunity to be a more flexible in how I work 11% 10% 17% A time for rest and relaxation The beginning of the end Figure 3: What is extremely important to a happy retirement Having a strong religious faith 12 Having work you enjoy 29 Having ambitions and dreams 37 Continally trying new things 43 Avoiding stress 51 Good financial planning 56 Staying young at heart Keeping fit Loving family and friends 63 64 65 Not having to worry about money 70 Keep your mind sharp 73 % 0 10 20 30 40 50 60 70 80 With 29% believing that having work you enjoy is extremely important in a happy retirement, it seems that UK respondents are adapting to the new reality of longer, less secure retirements in their willingness to consider flexible work. The UK has actively sought to encourage longer working lives through increasing the State Pension Age (SPA) from 65 today to 68 by 2043. 5
Nearly one-quarter of Britons expect to be much worse off than their parents in retirement. This rises to nearly one-third of those without a financial plan. 58% said that this was because the state pension was as not generous as it used to be, while 63% were concerned that their generation had not saved enough for retirement. A high number (57%) are concerned that company pensions are not as generous as they once were. This is certainly true, given that final salary schemes, which were common 30 years ago are now largely extinct. The retirees of tomorrow face a more uncertain future; as a result there is a sense that a golden age has passed and that the future will hold greater challenges. Figure 4: Better or worse off than your parents generation in retirement? (net score) Better off Worse off 80 70 60 50 40 30 20 10 % 0-10 -20-30 -40-50 -60 Global average (11) -22-20 -20-37 -56-4 11 16 17 23 29 31 33 34 42 62 69 France US UK Poland Canada Taiwan Argentina Saudi Arabia Singapore Mexico South Korea Hong Kong Brazil UAE Malaysia China India Figure 5: Why will you be worse off in retirement than your parents generation? People are living longer and need more savings 63 State pensions are not as generous as they used to be Company pensions are no longer as generous as they used to be 58 57 My generation is not saving enough Jobs and careers are less secure Low interest rates will mean lower returns on retirement savings The global financial crisis has reduced the value of my investments and savings Higher taxes will reduce the value of my retirement plans My generation has borrowed too much 51 49 48 46 44 42 % 0 10 20 30 40 50 60 70 6 The Future of Retirement
The shape of retirement is changing rapidly in the UK, as the population ages and the previously generous state and company benefit schemes become leaner. The financial crisis has exacerbated the ageing issue, increasing public debt and large government deficits leading to cuts in public services. Women are decidedly less upbeat than men about their fiscal futures, they are 18% more likely to associate retirement with financial hardship. Figure 6: Women associate retirement with financial hardship more than men 60 57 58 50 49 40 30 31 20 10 0 % Male Female Freedom Financial hardship 7
Shortfalls in retirement preparedness Our findings reveal a preparedness gap amongst respondents. 93% of those we surveyed claimed having enough money to live on in retirement as important, but only 60% said they felt adequately financially prepared. The preparedness gap in the UK is further emphasised by how worried people are about being able to cope financially in retirement: 62% said they were either slightly or very worried. Figure 7: Levels of concern about coping financially in retirement 1% 7% 20% Very worried Slightly worried 30% Not worried Not thought about it 42% Do not intend to retire The biggest reason why people are concerned about coping financially in retirement is because they don t think they will get enough from the state pension. Those admitting that they hadn t saved enough constitute 48% of respondents, and concern is greatest among women in their 30s and 40s, at 57%, suggesting that younger generations may be coming to accept the shift in responsibility from state to the individual. Unforeseen events are also unnerving respondents, yet only one-fifth of Britons (21%) feel that their family is very prepared if something should happen to them, suggesting a lack of asset protection and life insurance. Debt is an issue for many in the UK too, and high levels of household debt and the high cost of servicing repayments are a barrier to higher savings both for the long and short-term. Figure 8: Why people worry about coping financially in retirement 60 59 50 48 40 36 41 30 26 30 20 10 14 14 19 0 % I'll need to support my children or grandchildren through education I m concerned about the cost of looking after my parents in their old age I have too much outstanding debt I m worried that my investments won t perform well enough I m worried about the cost of ill-health I won t get enough from my work pension scheme I m afraid of unforeseen events depleting my savings I haven t saved enough I don t think I ll get enough from the state pension (e.g. social security) A worrying finding is that 17% of respondents do not know what their main source of income will be in retirement. Furthermore, 21% of respondents believe that their biggest source of income will be the state pension. The 9% who will be relying on personal pensions is a small minority in comparison, and these figures need to change if the UK is to be truly prepared for the future of retirement. 8 The Future of Retirement
Figure 9: Over-reliance on declining state and company pensions State pension (e.g. social security) Don t know Defined contribution pension scheme Defined benefit pension scheme Individual personal pension scheme Other savings and investments An inheritance Wages or salary from paid employment Rental income Socks and/or shares investments Selling your primary residental propety Selling assets tied up in investment propety Support from children/descendents Selling assets tied up in business 1 1 2 4 4 4 5 6 7 9 10 10 17 21 % 0 5 10 15 20 25 Clearly, there is a need to change current patterns of household behaviour to ensure a comfortable retirement. The new National Employment Savings Trust (NEST) may help to achieve this, but 57% are not aware of its existence, despite its planned introduction in October 2012. Whatever impact the scheme has on UK households, millions of people could benefit further from having a financial plan and seeking professional advice. 9
The power of planning Table 1: The four consumer types Global (% of global respondents) UK (% of UK respondents) Consumer types 38% 36% 12% 25% 22% 13% 28% 26% Non-planners: disengaged. These people are doing nothing by way of financial planning or financial advice. There is a complex mix of reasons why they do not make a plan; many believe they lack the necessary household income. Non-planners: advice-seekers. These people do not have a financial plan, though they do at least take professional financial advice from time to time. They are likely to seek advice around one particular need, rather than take holistic advice. Planners: active self-guided. These people have a financial plan in place but do not seek professional expertise to help them make sense of their finances. They are likely to be younger, mid-to-high income and internet savvy. Planners: advice-seekers. These people have a financial plan in place and also take professional financial advice to help manage their finances. In many respects they are very well prepared for retirement. As we have seen, a greater onus will be put on individuals to prepare for their own later lives. Currently, financial planning behaviour in the UK falls short of the global averages, with only 39% of UK respondents having financial plans in place, compared to 50% on average world-wide. However UK respondents are more likely to opt for professional financial advice instead, with Britons twice as likely as the global average to take financial advice without a plan. This finding suggests a tendency for the British to shift responsibility for their financial concerns about the future to professionals. The group who most embraced financial planning are young men (aged 30-39), 46% of whom did so. This suggests, amongst men at least, a generational shift in attitudes towards planning, as younger people see that they are facing a long retirement with less state or company pension provision than their parents. Figure 10: Younger men more likely to have a financial plan 50 46 40 40 34 38 39 37 37 40 30 20 10 0 % All males Male 30-39 Male 40-49 Male 50-59 All females Female 30-39 Female 40-49 Female 50-59 10 The Future of Retirement
The planning premium Our findings reveal that those with a financial plan for the future enjoy several benefits over those who do not the planning premium - and that these benefits are both hard and soft, including not only greater and more diverse retirement savings, but also a more positive outlook and fewer worries about later life. Respondents who undertook financial planning were more likely than non-planners to associate retirement with positive ideas such as freedom and less likely to associate it with negative ones such as financial hardship. Although it is difficult to separate cause and effect, these findings hold true when controlling for age and income. Whilst these benefits may seem obvious, the extent to which they are present in our findings indicates a significant soft benefit of planning for the future today; those with a plan have fewer sources of worry and stress. Figure 11: Retirement associations of planners and non-planners 80 70 70 60 50 50 49 49 47 48 40 30 20 10 0 % Freedom Planners 28 27 23 Happiness Opportunity Satisfaction Non planners 32 Wisdom 20 31 Excitement 16 28 13 16 5 Hope Wealth 15 22 Loneliness 15 14 12 20 Discrimination Fear 15 23 Loss of memory 18 30 Boredom 18 35 Poor health 23 Financial hardship Table 2: Planners have more retirement savings and investments Total retirement savings and investments (household median) (GBP), to nearest 000 % of global average UK average Nonplanners: disengaged Nonplanners: advice seekers Planners: active self-guided Planners: adviceseekers All nonplanners All planners 53,000 14,000 42,000 123,000 132,000 28,000 123,000 100% 26% 79% 232% 249% 53% 232% These figures are calculated using median data, which can produce the same results in different categories When we look at the retirement savings and investment levels of our respondents, we see that those with financial plans have over four times (433%) as much as non-planners. This shows that there is a strong planning premium in the UK in hard financial terms. 11
The advice advantage Those who have a financial plan in place and sought professional advice are the best off financially, with the largest retirement assets of all four consumer types. This reveals a further benefit for those who combine financial planning with professional advice the advice advantage. Advice-seeking planners have nearly two-and-a-half times (249%) more retirement assets than the UK average. Whilst it is difficult to separate cause and effect, these findings also hold true when controlling for age and income. Those who sought professional financial advice showed a preference for independent advice channels with 59% having visited an independent financial adviser, with banks the second most popular source of advice. Newer sources of advice such as online research are used significantly more in the UK than elsewhere globally. The benefits of planning, especially when combined with professional advice, that our research has shown suggests that whilst the UK faces a challenge over the coming decades in funding retirement, a wider culture of financial planning would be beneficial to both individuals and the economy as a whole. 12 The Future of Retirement
Conclusion Britons are on the whole relatively upbeat about retirement, particularly married couples and those on higher incomes, whereas women and those closest to retirement find themselves feeling most apprehensive. At the same time there is widespread concern that they will not be able to afford the sort of retirement currently being enjoyed by their parents generation. Such fears have been brought to a head by the impact of the financial crisis, which is forcing the UK to come to terms with structural problems in its pensions system. The government is embarking on reforms that will raise pension ages more rapidly than previously planned with the state pension age for men set to increase from 65 to 66 years as soon as 2016. For individuals and households who want to take action now to improve their financial well-being in later life, we have devised a simple 5-step checklist based on the research: 1. Establish some clear goals, both short and long term 2. Benchmark yourself 3. Establish a comprehensive financial plan 4. Implement the plan 5. Keep your plan under review Further details on the 5-step process can be found at the end of The Future of Retirement The power of planning global report. Large numbers of Britons are doing nothing about the shortfalls in provision to come, though the possible introduction of a universal state pension by the coalition government should make the state pension easier to understand. This could make it simpler to convince UK households to take steps towards saving for their own retirement. 13
HSBC Insurance Holdings Limited 2011 All Rights Reserved. Excerpts from this report may be used or quoted, provided they are accompanied by the following attribution: Reproduced with permission from The Future of Retirement, published in 2011 by HSBC Insurance Holdings Limited, London. Published by HSBC Insurance Holdings Limited, London Designed and produced by Global Publishing Services www.hsbc.com/retirement HSBC Insurance Holdings Limited 8 Canada Square London E14 5HQ