Pension age changes mean many work longer, save a lot more or retire poor, says Jeff Salway
The idea of working into your seventies won’t appeal to many people – but for anyone in their mid-thirties or younger, that’s exactly what’s on the cards.
Scottish children born this year will be working until they are at least 77 – giving them a potential working life of 60 years – under the planned increase in the state pension age.
The timetable, rubber-stamped in the Queen’s Speech last week, means the pension age will be going up by one year every five years.
Thousands of Scots have already been told by the Department of Work & Pensions over the last three months that they won’t be getting their state pension when they had originally expected it.
Some half a million people in Scotland will be getting their pension later due to planned increases in men and women’s pension ages to 66 by the end of this decade.
Further increases will be phased in over the following years, with the pension age hitting 67 in 2026, climbing to 68 five years later and then another year every five years.
People in their late thirties now – born between 1971 and 1975 – are on course to be the first generation forced to work until they are at least 70 until they can draw their state pension. Scottish children born this year face working until they are at least 77 – but experts warn that it is likely to be even later as further revisions are made to state pension ages, which will be linked to longevity.
Alison Fleming, head of pensions at PwC Scotland, said: “The era of retiring in your 60s is facing extinction with many people born today facing a future of work from 17 through to 77. People may want to stop working sooner, but the challenge will be whether they can afford to bridge the gap until the start of their state pension.”
In other words, anyone wanting to retire earlier than their pension age needs to take action – and that means planning ahead.
Your retirement age isn’t the same as your pension age – which means that if you have enough set aside you may be able to retire before you start drawing your state pension.
So how can you give yourself a chance of doing this?
For most people it really is a case of either working longer, saving more or retiring poor.
Reforms coming into force from October will see millions of workers automatically enrolled into workplace pensions, a government attempt to boost the number of people saving for retirement. The big advantage of workplace pensions is that your employer and the government also chip in. For example, under auto-enrolment, employees will eventually have to contribute at least £4 in every £100 of their salary.
But the amount that goes into their pension is doubled by the 3 per cent employer contribution and 1 per cent government tax relief.
A work-based pension is just one part of a good retirement savings plan, however.
“A growing band of people will have to fall back on alternative savings if they don’t want to work for longer,” said David Gow, a chartered and certified financial planner at Acumen Financial Planning in Edinburgh.
If you’re able to spare a bit more each month, the first port of call should be an individual savings account (Isa).
Up to £11,280 can be saved tax-free into an Isa, including up to £5,640 in cash. Regular savings can compound impressively, so the earlier you start, the easier it will be to build up enough cash to make your own decision on when to retire.
Gow said: “The best piece of advice is to heed common sense and save as much as possible – so start as early as possible, even if you can only afford to put away a little each month.”
For example, a 40-year-old wanting to save £300,000 by their late sixties would have to save £485 a month (based on 5 per cent growth after charges) or £350 a month (7 per cent growth).
Starting at 25 you’d only have to save £165 or £90 a month respectively to target that £300,000, while a 30-year-old would need to save around £275 or £170 a month to retire before the age of 70.
Personal pensions are also tax-efficient, thanks to the tax relief paid on them. This means that for every £80 you pay in, the government tax relief will effectively raise your contribution to £100.
If you’re a higher rate taxpayer you need to contribute just £60 to save £100 into the pension each month, following the 40 per cent tax relief.
However, just four in ten men and 37 per cent of women contribute to a private pension, recent Pensions Policy Institute research found.
Brian Steeples, managing director at The Turris Partnership, a Glasgow-based IFA, said: ”Most people with private pensions (however poorly they may be perceived) retire with a pension at or above the minimum wage.”
Also, make sure you get any financial help you’re entitled to, such as tax credits, child benefits and other payments. The benefits calculator at www.turn2us.org.uk/benefits_search.aspx can help you identify anything that you’re entitled to but might not be receiving. Keep track of all your savings and investments, too, especially if you’re nearing retirement. Some £3bn in pensions assets remain unclaimed, typically by people who have been members of schemes in several different companies. Armed with just the name of your employers and a rough idea of when you worked for them you can contact the government’s pension tracing service (call 0845 6002 537 or visit www.direct.gov.uk).
It also might be worth consolidating your pensions if you’ve built up a collection of them through past employers. That’ll not only make it easier to monitor how they are performing but will also reduce the charges you pay.
If you’re going to beat the pension age and retire when you want to, the key will be to plan ahead, according to Graeme Forbes, chartered financial planner at Intelligent Capital in Glasgow. “Take advice and do it as early as you can. Use a range of solutions – save into pensions, make sure that you regularly review your plan and that the investments are most suited to you even if it may cost you money to get the advice.”
Steeples agreed, warning: “Increased longevity without proper financial planning is a recipe for disaster.”
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