For the first time in history, there are more people over the age of 65 than under five. In another 20 years, this is set to double according to research from Torsten Sløk, the Chief Economist at Deutsche Bank.
An ageing population has been a topic of concern in many sectors. Recently much of the UK’s press has looked at the impact in relation to additional stresses being placed on health and social care services.
However, an ageing population is also a cause for concern when it comes to pensions, with more and more people retiring and no more young people entering the job market. This could have a variety of outcomes, including soaring pension costs or a significant increase in ages of retirement.
Whatever the eventual outcome, it is likely that more and more people will need to supplement their pension with additional income or savings. In the past, this has meant putting savings into something like an ISA, but with interest rates so low, it is possible more people will look to grow their savings through investments.
Before we look at that, though, why should you be worried about an ageing population impacting your retirement?
Economists fear an ageing population will result in much higher pension costs, with more people claiming for a longer period of time.
Typically, one of the steps governments take to counter this is to increase the age at which people qualify for the state pension. Without this, the burden of providing more taxes to fund this increase in cost falls squarely on the shoulders of younger generations.
In the OECD (Organisation for Economic Co-operation and Development), which includes countries like the UK and USA, there was an average increase of 3.4 years in retirement ages between 1980 and 2015. However, in the next 35 years up to 2050, research has estimated that retirement ages in the OECD will need to increase by an average of 8.4 years.
The same research has looked at the measures already implemented by OECD member countries and found they imply an average impact of 1.5 years.
This means that an increase in dependency on younger workers is a near certainty, but steps may still be taken to increase the age of retirement.
For the millions of people who will rely heavily on their state pension, this will come as a shock and independent savings may not be enough to allow them to retire at a lower age.
If retirement ages don’t rise and the extra pension costs aren’t recovered by additional taxes, a couple more options exist.
Governments could run at a financial deficit in relation to their pensions accounts. This, however, would only be a temporary solution, as this deficit and loss would eventually need to be made up for with additional contributions.
The only other option would be to increase employment rates. This, however, may prove difficult as a result of the increasing age of populations.
To increase employment you need a surplus of jobs, which requires consistent investment from both the private and public sectors. However, an ageing population is expected to result in “secular stagnation”, meaning savings increase and investment slows.
So, if governments refuse to increase pension contribution rates, run at a deficit or improve employability, there is only one option. The value you get from your pension will reduce.
It’s difficult to imagine this happening, especially since pensions are already considered by many to be too low, but we may see retirees feel the squeeze even more in the coming years.
The first impact an ageing population could have on the property investment market relates to demand. Property is used to going through trends, with different types of investments rising and falling in popularity. This can be seen today in the growing interest in investing in serviced apartments.
Clearly, if there is an increase in the elderly, then there is a good chance of a corresponding demand for accommodation to suit them. It may be a while before we see this demand impose itself on the property market, but for professional investors, it is well worth keeping an eye on.
Secondly, what is clear is that an ageing population will have a significant impact on the retirement plans of everyone, especially those currently between 30 and 50.
For these age groups, a question may arise about how they can secure their financial security when they retire and not worry about having to retire later or receiving less from their pension.
As previously stated, interest rates aren’t doing much to grow savings, so the next step is to look at other investment opportunities. Of course, very few people are willing to risk losing their savings, so the question of security plays an important role.
Like any investment, buying property comes with an element of risk, but on the whole, this is easier to manage than something like stocks.
Plus, a good investment that provides a strong rental yield can earn you money in the short term, while the capital growth is ready to be unlocked when sold on retirement. Of course, investing in property takes a lot of time and research, but there are currently many areas with strong investment credentials, especially in northern cities like Manchester and Liverpool.
With pensions coming under even more pressure as a result of an ageing population, it’s likely that more and more people are going to look for opportunities to grow their savings and secure their financial future.
If reading this article has made you wonder about what you can do to grow your own savings, get in touch to learn more about the property investment process.