Looking at retirement with a 21st century mindset

I wrote up some poorly considered thoughts about retirement and ISAs. This isn't going to be for everyone and shouldn't be considered financial advice. As always, do your own research and Your Mileage May Vary.

We've all read the headlines about how we're going to have to work longer into old age to be able to retire and it's easy to despair over it. Most people under 40 are going to have to work close to or into their 70s before retiring. We seem to have become very good at extending life expectancy, but not as good at extending life quality. Consequently, as opposed to retiring at 55 or 60 and getting maybe 5 good years and 5-10 terrible ones, we're looking at retiring at 70, possibly already with the problems that will lead to our demise stretched out over a period of 5-25 years.

Employment, Retirement and the Industrial Age

For a long time most people earned very little. The majority were born poor, we grew up poor, we died poor, often young. There was nothing by way of a social safety net, employee or worker rights and society was mostly agrarian, meaning most value was generated by manual labour.

The industrial revolution changed that, bringing people into cities and generating huge amounts of (relative) wealth, albeit with great disparity. Our of the industrial revolution came the idea of a job for life from a single employer, a post-war ideal that worked for a few decades until it's demise from the 80s onwards.

There are very few places in the west that offer a job for life, and people of working age have (mostly) adjusted accordingly. That job for life came with a pension, a way of buying an annuity that would ensure that in your final years you had enough money to eke out an existence. As our workforce ages and retirement pots thin, it's clear that most organisations from companies to governments have misused pensions as a ponzi scheme, robbing from them to tackle problems of the day and ignoring the liabilities looming in the distance.

The Gig Economy, and The Gig Retirement

Retirement used to mean stopping working for a living and essentially being on a permanent holiday from a work perspective, living off a pension and savings. In an environment where the fundamental driver of income is uncertain, pensions lose their relevance as an investment vehicle. If it wasn't for the tax breaks, pensions would make absolutely no sense in modern times. Living in the UK, there are various alternatives to pensions taking shape that make far more sense.

Perhaps the most notable of these alternatives is the fledgeling Lifetime ISA, or LISA. It's a tax-sheltered account into which you can save money or invest on the stock market. The Lifetime ISA was brought in by the mathematically challenged former chancellor George Osborne, and provides a 25% bonus on money paid in. The money can be taken out to pay for your first house, withdrawn from age 60 or you can pull it out earlier but lose the 25% bonus. It's way more flexible than any pension and when combined with compounding is frankly brilliant for people facing higher first-time house buying costs or looking to retire before 70. Because it's a tax-sheltered account, you've effectively already paid tax by the time you pay in so taking money out doesn't count towards your tax allowance. I'll come back to this in a minute.

That's not to say you shouldn't have a pension, but that you should look at pensions wisely. Most people with pensions are being robbed blind. Every 1% in fees that you're paying will take tens of thousands off your final pension pot when you reach retirement age, so these things matter. Fees are like boiling a frog in a pan of cold water. You're the frog, the fees are the heat. Taking control of your pension contribution requires some study, but can be fairly set and forget, and shouldn't take up more than half a day of your time a year. Do you really want to pay a company and chain of middlemen thousands a year for that?

In the old days, the responsibility for your continued employment for the most part laid with your employer. In today's world, that responsibility mostly lies with you. In the same way, the responsibility for retirement planning has shifted from your employer(s) to you.

Whereas previously retirement was a time where people didn't generate income, there's a general sense that in retirement now, we still generate income. A base level of savings is needed to ensure that your basics are covered in your older years, and there are a great many blogs and communities that serve to provide a better job than I can of telling you how plan for your old age. However, that income generation can soften the road to retirement.

When we reach retirement age, generally our incomes are lower. Savings typically go into pensions tax free, up to a certain point. Up to a certain point the pension savings pot remains tax free. When we withdraw our pensions from the pot, we end up being taxed over and above a certain amount. This is where ISAs and LISAs can be really helpful, allowing us to top-up our pension drawings in a more flexible way and reduce pensioner tax liabilities. We shouldn't chase the lowest tax option, but given that LISAs have a low limit each year and can offset tax withdrawals down the line they seem a fairly compelling place to park side hustle cash if you have any.

Retirement doesn't need to be a one off thing. In the job for life period we'd start work at Company A at 16-24 depending upon education and retire at 55-65. It's now feasible to take a break at any point along your career (providing you can afford it). If you work in a skilled job that's in demand it's perfectly possible to cut back and downsize your career.

What about those just making ends meet?

There's no polite way to put this. You're screwed. You always were from the day you were born. You were screwed by the baby boomers who took the money early Gen X'ers were paying in to pensions to fund social programmes and pay for company director bonuses. You're also screwed by the Gen X'ers who made money by buying houses on the cheap. If you're going to try and fight this by playing the same game they did, you're going to lose out.

A 20th century approach will not solve a 21st century problem. If you're swimming in debt, get some solid advice on restructuring and commit to it. Every pound of debt you clear is breathing room. Every pound you save is either emergency cash or cash towards getting off the treadmill. This chart from Reddit saved my (financial) life. It might save yours:

/r/ukpersonalfinance's What to do with money chart

If you're on a zero hours contract, you are at the lowest end of the low end. Your employer isn't even obliged to give you work, yet somehow you're not entitled to unemployment benefits. Ultimately if you're not getting enough hours then you're going to have to find something else. That's a really truly horrific situation to be in, and it makes me sad that we live in a world where people are in this situation.

Finding something else doesn't mean jacking in a zero hours gig and looking elsewhere for a job. It means finding other sources of income that you can use to displace the zero hours gig over time. I'm not suggesting that you give up the job and try to become a dot com millionaire, but the barriers to running a part-time business have dropped massively since I first started out.