The reality of a flexible retirement where workers reduce their hours and top up their income with a pension means they will have to work into their late seventies, according to research by Royal London.

The report entitled, The Mirage of Flexible Retirement, states that those in their twenties and thirties, who have been auto-enrolled into a pension, with years to go until retirement will not be able to afford to fully retire based on the legal minimum pension contribution. Therefore, Royal London argues that the idea of a flexible retirement may be a ‘mirage’ for people saving at current levels.

The report considers the outcomes for those who are targeting a ‘gold standard’ retirement (where income at retirement is two-thirds of pre-retirement levels) or a ‘silver standard’ retirement (where income at retirement is half of pre-retirement levels).

For those who want a pension which simply provides a flat income with no protection against inflation and no support for a widow or widower, the research found that a worker targeting a ‘gold standard’ retirement who retires gradually will have to work until they are 79 before they can afford to retire; this compares with retirement at 74 for a worker who defers taking a state pension and maintains full-time hours until they stop working.

A worker targeting a more modest ‘silver standard’ retirement but who retires gradually would have to work on until they were 69; this compares with retirement at 68 for a worker who defers their state pension and continues in full-time work.

However, a person targeting a pension which provides protection against inflation and something for a widow or widower could still be working into their eighties before they have enough money to afford to retire.

These extreme retirement ages can be avoided by saving more that the legal minimum (Currently planned to increase to 8 per cent) into a pension, Royal London said. For example, a rate of 10 per cent allows an individual to retire around three years earlier, whilst a contribution rate of 12 per cent allows an individual to retire around six years earlier.

As a rule of thumb, the report found that even for workers who do not start saving into a pension until they are in their thirties, each extra 1 per cent on the pension contribution rate reduces the number of years that they have to work by at least one year. With average earnings assumed at £27,600 per year, an additional 1 per cent of ‘qualifying earnings’ (the excess over the floor of £5,824) would be just over £4 per week, including any contribution from the employer, the employee and tax relief.

Commenting on the results, Royal London director of policy Steve Webb said: “A flexible retirement, where we can gradually reduce our hours and stop work at an acceptable age, is likely to be a mirage for millions of people based on current levels of saving. Those who opt for a gradual retirement, drawing a state pension as soon as they can and cutting their working hours could easily find themselves unable to afford to retire fully until they are in their late seventies or beyond unless they have built up a significant private pension pot”.

“The good news is that there is an antidote to excessive working lives and this is higher rates of pension contributions. We find that each one per cent on pension contribution rates takes at least one year off the number of years for which you have to work to achieve a decent retirement. For those who want to have choices in later life about when and how they retire, doing more now to build up a decent pension pot is becoming essential. These findings need to be considered carefully by the government as it reviews the rules around automatic enrolment in 2017”.

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