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Ready to work longer?
Thanks to changes already announced, we will soon all be
waiting longer for our state pensions.
From next year, the state retirement age for women will start
rising from 60 to 65; and from 2024, the retirement age for both
men and women will gradually be increased towards 68, which will
be achieved by 2046.
If that sounds a long way off, it is worth considering that
it will start to affect people who are currently in their 40s.
It is understandable that the government is making these
changes. We already know that, on current population
projections, the proportion of the population that is working
(and therefore paying national insurance contributions) is
shrinking compared with the number of people over retirement
age. It is also clear that people are living longer in
retirement than previously.
When do you want to retire?
But if you were to ask most people whether they actually want
to carry on working into their late 60s, or stop when they are
much younger and better able to take advantage of a more relaxed
lifestyle than most busy careers permit, they would probably opt
for early retirement. Of course, for most people, the
state pension will only form part of their retirement income; if
they are members of an occupational scheme, or have a personal
pension, this could well provide far more for them.
How important is the state pension?
The state pension does matter
But actually, the state pension could form quite a large
proportion of a retired couple’s income. Let us take a very
simple example of a couple who on the same day reach retirement
age (65 for the husband and 60 for the wife). He earns £27,000 a
year and is in a final salary scheme that provides the maximum
40/60ths (i.e. £18,000) as a pension, she has a personal pension
scheme that will provide £3,000 a year. Because each has a full
national insurance contribution history, they both receive the
full basic state pension of £4,953 a year. Their total income is
therefore £30,906 a year, of which the basic state pension
contributes almost a third (£9,906).
If they had to wait longer for their state pension, they
would have to survive on a much lower income during the interim
period; reducing their spending power considerably.
What can they do?
Of course, they could decide to carry on working longer –
perhaps on a reduced-hours basis, until the state pension cuts
in. An alternative would be to increase their retirement
planning provision, perhaps using additional personal pensions,
or alternatives such as Individual Savings Accounts (ISAs). The
benefit of using an ISA
is that money is accessible at any time without restriction
(unlike a pension). Building up a fund of, say, £30,000 could be
achieved by a couple in less than two years, thanks to the new
£10,200-per-person investment limit for everyone from 6/4/2010.
This would enable them to draw the additional £10,000 each
year for three years, if necessary.
Anything else?
Just to complicate matters, some politicians think that
increasing state retirement age should be brought forward from
2024!
It is important always to seek independent financial advice
before making any decision regarding your finances. For further
information, please contact your usual independent financial
adviser. The value of investments is not guaranteed; you may get
back less than you put in.
Key points
- Retirement will last longer as we reach greater ages
- If state pensions start later, you will need to fill the
gap, unless you wish to carry on working
- The changes may not yet be finalised
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