How to keep your pension plans on track as government moves to raise retirement age

THE age from which individuals can receive their state pension may rise in 2016, under new proposals.

Those whose retirement age will be put back from 65 to 66 will lose the state pension for a year, the equivalent of just over 5,000. However, the prospect of the pension age eventually being raised to 70 (and even beyond) may have more serious financial consequences for many younger workers. Richard Johnston, chartered financial planner at Murray Asset Management in Edinburgh, shares his tips on staying on target to retire at 65

1 State pension eligibility

Individuals require 30 qualifying years of national insurance (NI) contributions for entitlement to the full basic state pension. Those not expected to have the full requirement can buy additional years by making voluntary contributions.

These can be great value for money and should be seriously considered. A state pension eligibility forecast can be obtained by completing a BR19 form and issuing it to the Pension Service.

2 Employer pension schemes

If your employer offers a pension scheme to which it makes a contribution, it is probably in your interest to join it if you have not already done so. Typically, an employer might offer to make contributions of, say, 5 per cent of an employee's salary if he or she agrees to make contributions of, say, 3 per cent. Unless the employer offers a flexible benefits package, this 5 per cent of contributions will be lost to the employee who declines to join.

3 Use the tax system

A higher rate taxpayer should normally be eligible for 40 per cent tax relief on pension contributions. However, many higher rate taxpayers (perhaps the majority) become lower rate taxpayers in retirement, so it is wise for anyone who can afford to do so to maximise pension contributions - while still working - to take advantage of higher-rate tax relief.

4 Bonus sacrifice

Consider asking your employer to direct any bonus payment towards your pension plan instead of paying it in cash. You will still effectively receive tax relief, as normal, but will also save on NI for both yourself and your employer. It is especially important to request that the company passes on some, if not all, of its saving to you in the form of an enhanced pension contribution.

5 Invest appropriately

Not only should this mean choosing well-managed funds, but also the level of risk taken should be monitored. In particular, anyone likely to disinvest his or her pension over the next few years to purchase an annuity should consider reducing the risk so they do not suffer from any sudden market falls shortly before the date of retirement.

Conversely, younger investors could consider taking more risk to obtain higher potential for returns over the long-term.

6 Understand your options

The traditional way of using a pension to provide regular income during retirement is to buy a lifetime annuity, which provides a fixed income. Annuity rates are low at present so consideration should be given to the other options. Income withdrawal, in particular, allows a pension fund to remain invested while gradually releasing money. While this can entail higher charges and more risk, it can be a worthwhile alternative to poor annuity rates.

7 Go annuity shopping

If an annuity remains the preferred option, individuals have the right to transfer their pension benefits to a firm offering a more attractive annuity rate than their existing pension provider. In addition, anyone with health issues - or, even if healthy, admits to being a heavy smoker and drinker - may be eligible for an enhanced annuity rate as their life expectancy will be lower.

8 Tax-free cash

Up to 25 per cent of a pension pot can be taken as a tax-free lump on retirement.

But unless this money has been earmarked for a specific purpose, it would be wise to invest it safely to supplement your retirement income, especially if you retire two or three years before becoming eligible for the state pension.

9 Isa opportunities

Pensions are not the only method of funding for retirement. An investment Isa is a particularly tax-efficient solution, especially for those with a larger pension pot who will still pay higher rate tax after they stop working. Isas can supplement income or provide a cash reserve for a rainy day.

10 Look into the future

Although many of us have some idea of the age at which we'd like to stop working, this will be dependent on balancing our anticipated income with lifestyle choices.

Therefore, while they are relatively young (and throughout their working lives) individuals should keep track of what they can expect to receive on retirement. The sooner any potential shortfall is identified, the greater the options there will be to remedy it.

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