Pensions hit the headlines again this week when Shadow Chancellor George Osborne announced that a Conservative government would raise the state pension age. For men, his proposals would mean a rise from the current 65 to 66 by 2016. Meanwhile, women would see a rise from 60 to 66 by 2020 at the earliest.
The idea isn’t entirely new – Labour was already planning to raise the state pension age to 65 for both men and women by 2020, then rise to 68 for men by 2046. So “anyone aged under 50 today is going to see their state retirement age rise regardless of which party gets into power”, says Tom McPhail of Hargreaves Lansdown in The Sunday Times. And those still planning to retire aged 65 (or less) will need to act soon if the Conservatives – still well ahead in most polls – have their way. But what to do?
Everyone outside a final salary scheme still needs to be saving as much as they can in a private pension. However, those closer to retirement will need to increase the amount they are saving to make up for the one-year shortfall a later state pension age will create. For example, a 58-year-old man who still wants to retire at 65 would need to save an extra £55 a month until retirement to make up for the loss of a year’s state pension, according to Hargreaves Lansdown. Meanwhile, a 54-year-old woman could get away with saving an extra £35 a month.
Those amounts may not sound too horrendous, but remember that all you are doing is restoring your existing state pension entitlement. That’s just £95.30 a week at present, which is clearly not enough to fund most people’s retirement plans.
The key to a comfortable retirement is therefore to start saving as much, and as early, as possible. If a 25-year-old puts £100 a month into a pension, they will have a pot worth £96,268 – based on annual growth of 7% a year – at the age of 65. But delay starting by ten years and that sum would be just £46,371, says Jane Baker on Lovemoney.com.
And make sure you are saving in the most tax-efficient way possible. Use your annual Isa allowance first (£10,200 if you are aged 50 or above), because the money isn’t locked up. Then open a personal pension to take advantage of tax relief on contributions of up to 40% for a higher-rate taxpayer. If your company offers a pension contribution, sign up for it. Some companies will match the amount you save into a pension every month, which will help your pension pot build up far faster.
Finally, if you are faced with retiring and buying an annuity (which pays an income in return for a lump sum), shop around for the best deal. Sites such as Thisismoney.co.uk will help you pick the best provider.