The retirement risk advisers may be overlooking

Client conversations can cover some of life's most difficult possibilities, from divorce and bereavement to serious illness and market downturns. But there is another risk that can have a profound impact on someone's financial future: what happens if a client cannot keep earning for as long as their retirement plan assumes?

Almost 900,000 people aged 50–64 in the UK are not in work but would like to be, according to government figures. Poor health and caring responsibilities are among the factors keeping people out of the workforce, while others may find themselves made redundant or struggling to secure suitable roles.

And professional success does not necessarily insulate someone from this risk. We increasingly hear stories of people who have enjoyed successful, well-paid careers only to find opportunities become harder to secure in their 50s.

For some, an unexpected exit from the workforce can mean retiring years earlier than planned. For others, the impact is less dramatic but still financially significant: returning to work on a lower salary, accepting a less senior position or working part-time when they would prefer full-time employment.

Any of these scenarios can fundamentally change the assumptions underpinning a retirement plan.

Someone who expected to work until 67 but stops earning at 57 doesn't simply lose ten years of salary. They may lose ten years of pension contributions, ten years of potential investment growth and, if they begin drawing on their retirement savings earlier, potentially have years more of retirement to fund.

For advisers, this raises an important question: should a client's future earning capacity be stress-tested in much the same way as other risks to their financial plan?

Looking beyond the retirement date

At Fidelity, we wanted to understand more about the conditions that enable people to continue working later in life.

Our new Fidelity Longer Working Lives Index, developed with employment experts and informed by a review from six international experts, compares how well the G7 countries support people aged 55 and over to remain in work.

Crucially, we deliberately looked beyond employment rates. Having large numbers of people working later in life does not necessarily mean a country has created good outcomes for them.

Instead, the index asks four questions of people aged 55 and over in each country:

1. Can they work? We consider factors including health, caring responsibilities and workplace flexibility.
2. Do they want to work? This includes job satisfaction, confidence in retirement plans and whether people considering working longer are doing so through choice or because they need the income.
3. Are they working? Here we consider employment, unemployment and long-term unemployment.
4. Are they in rewarding work? We look at earnings, participation in job-related training and involuntary part-time work.

Together, these provide a broader picture of longer working lives – not simply whether people remain employed, but the circumstances in which they do so.

The results are striking. The UK ranks last overall among the G7 countries, with particularly weak relative performance on Work Choice & Motivation (i.e. “Do they want to work?”).

Among UK over-55s considering working longer, 37% say they would do so because they need the income to get by in retirement – the second-highest proportion in the G7. Almost a third (30%) describe their retirement planning as poor.

There are challenges around work quality too. Full-time workers aged 55–64 in the UK earn on average around 2% less than those aged 25–54. The UK is one of only two G7 countries where the older cohort earns less than the younger comparison group.

None of this means that everyone should aim to work for longer. Quite the opposite. Working longer should ideally be a choice, rather than something someone is forced to do because their retirement finances leave them with no alternative.

That is where financial planning has an important role to play.

What does this mean for advisers and their clients?

1. Stress-test the retirement date

A client's intended retirement age can easily become treated as a fixed input in a financial plan. But it is ultimately an assumption.

Advisers could consider exploring what happens if that assumption proves wrong. If a 50-year-old client intends to work until 67, what would their plan look like if their earnings stopped at 60? What if they could continue working but only at a lower salary? Or what if health or caring responsibilities meant moving to three days a week?

Modelling different scenarios can help clients understand how resilient their plans are – and identify potential problems while they still have time to address them.

2. Talk about future earnings, not just current wealth

This could be particularly relevant for affluent clients.

Someone in their 40s or early 50s with a high salary may reasonably expect their remaining working years to be among their most lucrative. Their retirement strategy might therefore involve significantly increasing pension contributions later in their career.

But relying too heavily on those future earnings creates its own risk. A redundancy or unexpected reduction in earnings at 55 could leave much less time to make up a retirement shortfall.

That doesn't mean advisers need to become careers consultants. But conversations about retirement could include some simple questions about how clients view their future careers: How secure do they feel in their current role? How transferable are their skills? Would they be willing or able to work differently if their circumstances changed? If they are self-employed: what would happen to the business if they were no longer able to work?

3. Build flexibility into retirement plans

The traditional idea of working full-time until a predetermined date and then stopping altogether does not reflect everyone's experience.

Later working life might instead involve reducing hours, changing careers, consulting, setting up a business or combining part-time work with drawing some retirement income. Our research argues that retirement should increasingly be thought of as a journey rather than a single event.

For advisers, modelling some of these possibilities could help clients understand the value of flexibility. A client who cannot continue in their existing role until 67, for example, may discover that earning a smaller amount for a few additional years could materially improve their retirement position.

4. Encourage clients to plan before they have to

One of the clearest lessons from the research is the value of engaging earlier.

The aim isn't to predict whether a client will be made redundant or develop a health problem in ten years' time. It is to build sufficient resilience into their finances that an unexpected change does not automatically derail their retirement.

That can reinforce familiar planning principles: saving and investing earlier, maintaining appropriate emergency savings, making use of pension allowances where appropriate, and regularly revisiting the assumptions on which a financial plan is built.

5. Recognise where financial advice ends

Career resilience and financial resilience are increasingly interconnected, but advisers don't need to provide all the answers themselves.

Where clients are worried about remaining in work, advisers could consider signposting them towards appropriate external support. The Government's Midlife MOT, for example, is designed to help people take stock of their work, wealth and wellbeing in midlife and connects users with support across those areas.

The adviser can then concentrate on the financial implications: if a client's working life does change, what does that mean for the plan – and what options do they have?

A new question for retirement planning

As longer lives and rising State Pension Ages reshape retirement, the question facing clients is no longer simply “When would you like to retire?”

Perhaps advisers should increasingly follow it with another: “What happens to your financial plan if you can't keep working until then?”

Nobody can know exactly how their career will unfold. But by incorporating that uncertainty into financial planning earlier, advisers can help clients build greater resilience and ultimately give them more choice over how and when they stop working.

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