Men and women in their early 50s will need to work longer and save thousands more into their pensions – or face a poorer retirement – if the government brings forward its planned rise in the state pension age to 67 a decade earlier than expected.
Pension advisers issued the wake-up call this week, after Iain Duncan Smith, pension’s minister, said that the present timetable for rising the state pension age from 66 to 67 was “too slow”.
Under reforms planned by the previous Labour government, the earliest age at which men and women can claim their state pension had been scheduled to rise to 66 by 2020 and 67 in 2036.
But the coalition government said that it favors a faster rise in the state pension age to 67, reportedly as early as 2026.
“We’ve been clear that the current timetable for moving the state pension age to 67 is too slow, due to the staggering increases in life expectancy and we are committed to reviewing the date,” said a spokesperson for the Department of Work and Pensions (DWP) this week. “We are continuing to look at how pension ages beyond 66 will be set, including considering an automatic mechanism.” The DWP added that “no decision has been taken yet”.
An acceleration in the state pension age to 67 in 2024-2026 would hit those born between 1958 and 1969 – meaning that people currently between the ages of 42 and 53 would have to wait a year longer than expected to claim their state pension.
Alternatively, to make up an extra £5,312 to cover that ”missing” year of the state pension, a 47-year-old would have to start saving about £10 extra per month from now, in a personal or defined contribution company scheme, according to independent financial advisers Hargreaves Lansdown.
“If they wanted to target a lump sum of £7,500, which is roughly where we expect the new universal state pension to end up, they would need to save around £14 a month,” said Tom McPhail, head of pensions research with Hargreaves Lansdown.
But for a 53-year-old, that extra contribution rises to £50 extra per month from now, to compensate for getting the state pension a year later.
“Someone who didn’t make additional provision in the form of increased saving or chose to retire later would be permanently worse off as a result of the change,” McPhail warned.
They would have to rely on private savings, either by taking more income drawdown from their pension funds in the first year, or from non-pension savings such as individual savings accounts (Isas).
Another alternative is to work longer. Following the abolition of the default retirement age in April, older workers facing an income crunch will not be forced out of the workplace, if they decide they need to earn more to boost their retirement income.
However, female campaigners this week urged the government not to increase the women’s state pension age beyond 65 until 2020.
Proposals in the Pensions Bill, which is due to receive its final reading in Parliament next month, will see 300,000 women born between December 1953 and October 1954 having to wait up to two years longer for their state pension than under the previous government reforms, losing an average in £10,000 pension as a result.
Women’s state pension age is currently rising from 60 to 65 and had been planned to reach 66 between 2024 and 2026. However, under the new rules, this will be brought forward to 2020.
“People need enough time to plan appropriately, whether that means working longer, if they can, or saving extra,” said Tony Attubato, head of dispute resolution with the The Pensions Advisory Service, an independent, non-profit advice organisation. “People really need to think about what kind of income they want in retirement and whether it will be enough.”
This advice came as new research, published this week, showed that nearly 15m workers don’t have personal or company pensions – and will have to rely on the state pension or savings to fund their retirement. Prudential, the pension provider that produced the research, claimed that individuals are missing out on up to £15,000 in tax relief by not contributing to a pension throughout their lifetime.
Individuals who want an estimate of how much state pension they will receive can obtain a forecast from The Pensions Service online at www.dwp.gov.uk/thepensionservice or by calling 0845 3000 169.
By Josephine Cumbo. FT.com full article - LINK.
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