Fight back against increases in the state pension age and retire up to eight years early with Telegraph Money’s ultimate guide to bridging the retirement gap.
The state pension may not be falling in value – it is “triple-locked” (at least for now) to rise in line with the highest of inflation, earnings increases or 2.5pc – but it is getting further out of reach.
For decades the rules were static: men received the pension at age 65 and women at 60. Not any more. Women born in the Fifties must wait until at least 65, and by the end of the year the state pension age will be 66 for both sexes. For younger people it will be 67 or 68 and the Government has not ruled out more increases should life expectancy continue to rise.
We are working longer as a result, with a record 1.2 million – more than 10pc – of over‑65s employed, double the number when records began in 1992. Only half are still employed by choice, however.
Luckily, a rising state pension age need not be a barrier to retiring as you originally planned if steps are taken now.
You can withdraw money from private pensions from age 55, or sooner if in severe ill health. So it is possible to start drawing a private pension while you are still working and before you reach state pension age.
Flexible access, introduced in 2015 under the “pension freedoms”, allows you to dip into private pensions as you wish and annual withdrawals can vary according to your needs. Savers could, for example, make a few larger withdrawals before the state pension starts to fill any income gaps and then stop or reduce the withdrawals when the state pension starts.
The first step is to work out how much a later state pension age will cost you in “missing” income, then build an investment portfolio to bridge the gap. Ultimately the goal is to achieve a retirement age up to eight years earlier than the Government has dictated.
Kay Ingram of LEBC, a financial adviser, said: “The more you define the lifestyle and level of income you are likely to need to live it, the better your chances of achieving it.”
Telegraph Money asked Whitechurch Securities, a wealth manager, to identify some investments to do just that, depending on sex and age (an early start will make the task much easier). As examples we take a woman aged 35, the demographic most affected by the changes, a woman aged 50 and a man the same age.
How ‘Ms Millennial’ can retire eight years early
A 35-year-old woman today should know well in advance that her state pension will arrive far later than her grandmother’s did. Under the old regime our 35-year-old would have retired in 2044, but this has been pushed back to 2052, when she will be 68. She has time on her side but must make the most of it to retire at 60, as she would have expected to in her 20s.
Based on the new state pension, and assuming it keeps rising by 2.5pc a year, Ms Millennial’s total “missing” income is £122,812. Her long time horizon will allow her to take more investment risk in a fairly adventurous portfolio to achieve her financial goal.
Using industry figures for the kind of return you can expect for this level of risk, a sensible aim is a gain of 5.7pc a year. At this rate Ms Millennial would need to invest £195 a month for the next 25 years to cover the £123,000 shortfall in her state pension. We assume she will want to take an “ethical” approach to investing.
How ‘Mrs Missing’, 50, can retire seven years early
Women in their Fifties have been especially hard hit by the rise in state pension age. A 50-year-old woman today has seen her pension age jump to 67, pushing her retirement back to 2036. Unless she now makes changes to her financial plans or extra private contributions, she will no longer be able to retire at 60 as she once expected.
Using 25-year average figures for a more cautious investment portfolio, given the shorter time horizon, projected returns for Mrs Missing’s portfolio are 5pc a year. She will need to invest £550 a month for the next 10 years to generate the £85,000 she needs.
How ‘Mr Missing’ can retire two years early
Before the pension age increases a 50‑year‑old man today could have expected to receive the state pension at 65 in 2034. With his pension age now 67, that is pushed back to 2036. To retire as previously planned he needs to act now.
Keeping all our other assumptions for the state pension the same, his “missing income” will be £12,711 in the first year and £13,029 in the second, giving a total hole of £25,740 to be filled by age 65 to cover those two years for which he will no longer quality for the state pension.
Like Mrs Missing, he doesn’t have long to make up the shortfall or to recover investment losses, so should opt for the same fairly cautious portfolio. With the same projected returns of 5pc a year, Mr Missing would need to invest a fairly modest £98 a month for the next 15 years to cover the missing income. This money should be split in the same way as Mrs Missing’s.
9 ways to beat the state pension age rise
Invest in a financial plan
Work out the gap between when you would like to retire and your state pension age, as this can help you judge the level of investment risk you need to take and amount you must save, Ms Ingram of LEBC, the advice firm, said.
A financial plan can help identify potential bumps along the road and help you provide for them through emergency savings or insurance. Update it regularly to take account of investment returns on savings, inflation, taxation and changing personal circumstances.
Join your work pension scheme now
All employers are required to pay into a pension for employees who earn £10,000 a year or more and those whose earnings are in excess of £6,136 a year may also request to join the firm’s pension scheme. Employees pay 5pc of their eligible earnings with the employer contributing a minimum of 3pc. Tax relief is added on top.
Make the most of tax relief
Higher rate taxpayers may claim additional tax relief from HMRC. This means £10 saved costs the individual £8, £6 or £5.50 for basic, higher and top rate taxpayers respectively. In most schemes basic rate tax relief is given automatically but higher and top rate relief needs to be claimed from HMRC. Claims for previous years can be backdated up to four years.
Top up the minimum contribution
"Put as much into your pension as you can, not just the minimum," Ms Ingram advised. This can be 100pc of earnings or £40,000, whichever is lower, and benefits from tax relief. Those with income above £110,000 have this allowance reduced to a low of £10,000. Some employers also match additional contributions, boosting the value of your savings further. If you are self-employed, or would prefer not to add to your employer’s scheme, you can have your own private pension alongside any workplace pension.
The earlier you start saving the less it will cost you to retire early. This is because of the effect of compound investment returns over a longer period as well as the additional amounts paid in over time.
If these are savings not needed for decades ahead, taking a medium to high level of risk now is more likely to protect your savings against inflation over the longer term. Taking too little risk could mean that you must wait longer before you can afford to retire.
It's not too late
If you are late starting your pension savings, it is still worth making contributions. Use your maximum allowance, plus the balance of the last three years allowance not yet used. Tax relief is given at the rate you pay in the year when you make the savings – this means a pay rise which takes you into a higher threshold will get you a higher proportion of tax relief.
Check your National Insurance contributions
Get the most out of the state pension when you become eligible. Under the flat rate scheme the maximum is £168.60 per week, available once 35 years NI contributions have been paid. Only those reaching state retirement age after 2051 will automatically qualify, however. Anyone born before 1983 could get less or more in total, due to transitional arrangements with the old state pension.
You are likely to get less if you have not paid enough NI contributions or "contracted out" of the old state earnings related scheme. Get a forecast of your state pension and if it comes up short consider claiming top ups, which are free, or paying in extra voluntary contributions. Free credits are payable to carers of children under 12 or adults who qualify for disability benefits.
Each year’s credit or voluntary top up buys £250 per year of extra state pension. Top ups cost £780 per year currently, meaning it will take less than four years of receiving your state pension to make your money back, and you get the extra pension for the rest of your life. A higher state pension payable later will enable you to draw more out of your private pension earlier.
You don't have to be employed
Non-earners under age 75 can also get the benefit of tax relief on pension savings with up to £2,880 per year (£240 per month) being topped up with tax relief at 20pc to £3,600 (£300 per month) regardless of whether they pay tax or not. With the state pension age likely to rise in line with life expectation, parents may wish to give their children the option of an earlier retirement date by starting a pension plan for them.
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