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Retirement Age in the UK impact on investment Over the next 3 decades, the number of people reaching retirement age is expected to increase from 18. 2 % of the UK population to 22. 3 %. The rise of the proportion of people over 80 will be even more perceptible. At the same time the number of people less than 20 years old is expected to fall from 25. 1 % to 21. 9 %. This change in the structure of the population has a lot of importance for savings, investments and government expenditure. According to economic theory, savings rate will increase as the population ages, as people will try to save to ensure an income in retirement (either explicitly in certain contribution schemes or implicitly through definite benefit schemes). With the progress of ageing, the ratio of savings will decrease due to the fact that pensioners will dis-save in order to consume and to spend in retirement.
The retirement age and the age at which contributions start are directly connected to expected income in retirement. Any institutional impediments to later retirement are highly undesirable, for example connection between the minimum income guarantee and state pension age. The significance of deinstitutionalising the age of retirement is worthy of explanation. Due to ageing of the population and consequent shrinking of the workforce, labor becomes scarce. High wages are a price signal which gives people incentive to stay in the labor force for longer time. Some people may be tempted to react to this price signal and continue doing their jobs, for higher salary, others may not.
Workforce markets should be given freedom to respond to this price signal, so that the supply of labor can improve. A fixed state retirement age and a guarantee of minimum income connected to age is very likely to hinder the labor market response and create obstacles in the economy. (Executive Summary The Impact of Demographic Change, Philip Booth and Deborah Cooper, 2000) Research conducted by Norwich Union, the UKs largest insurance company, indicates that 60 % of stakeholder pension customers have plans to retire when 60 years old or earlier. However, too many stakeholder customers are paying insufficient contributions into their plan to ensure that they have a comfortable amount to retire on at their desired retirement age. For example, 77 per cent of stakeholder customers between the age of 31 and 45 are paying less than? 150 a month into their plan. The impact of this could be stark for someone planning to retire early. For example, a 35 year old male, paying? 150 a month into a stakeholder pension and planning to retire at 65, would have a projected pension pot of? 149, 000 at retirement and a pension of? 13, 700 (based on investment growth of 7 per cent a year and interest rates of 6 per cent at time of retirement).
However, using the same example, if you bring forward the retirement date by five years to 60, then the customer would have a projected pension pot of? 46, 000 less at? 103, 000 and a pension of? 8, 430, which is 38 per cent less. (Early retirement could be uncomfortable for many, says Norwich Union, 2002) Louise Goffee, spokeswoman for Norwich Union commented, Stakeholder has undoubtedly given impetus to the pensions market, however, most people want to retire as early as possible but are simply not doing enough about it. Unless people contribute more, their chosen retirement dates could end up being no more than wishful thinking. (Early retirement could be uncomfortable for many, says Norwich Union, 2002) The reason why a rise in the retirement age is needed is that it will help to decrease the dependency ratio from where it would be if nothing were done. A lower bond yield will also be possible. Because raising the retirement age shifts a group of people from the top line to the bottom line of the dependency ratio, the ratio can change quite quickly. If people remain in work for longer, the working-age population will rise faster than the number in that fixed band. Assuming that average worker productivity is unchanged, this means that real economic growth forecasts can be higher, and consequently the models can justify a higher valuation for equities. (A Lower Water Mark, 2004) Reference list: Executive Summary The Impact of Demographic Change, Philip Booth and Deborah Cooper, Social Insurance Reform Research Unit, City University and Gabriel Stein, Lombard Street Research, Feb 2000.
Retrieved April 9, 2005 from web Norwich Union Business. Early retirement could be uncomfortable for many, says Norwich Union, March 2002. Retrieved April 9, 2005 from web Standard Life Investments. A Lower Water Mark, June 2004.
Retrieved April 9, 2005 from web
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Research essay sample on Retirement Age In The Uk Impact On Investment
