Planning for later State Pensions

Investors may be pleased to learn that they no longer have to purchase an annuity with their pension fund by the time they reach 75, but news that they could have to wait a very long time for their state pension will be less welcome. The state pension age, already set to rise to 66 by 2020, could soon be subject to a new ‘automated’ approach towards future age increases based on regular, independent reviews of longevity. So, as people continue to live longer, they will have to wait even further into old age before the state pension starts. So 66 could eventually become 70, 75 or even later.

A retrograde step? 

Actually, the Old Age Pension, as it was then called, was introduced by Lloyd George in a 1909 Act to provide a (noncontributory) pension for those aged 70 or over. This was at a time when few people could expect to reach such an age, so the fact that our new system is still intended to start providing benefits well before people reach the end of their lives means it remains superior. The 1909 version paid a weekly pension of between 10p and 25p a week (the pre-decimalisation equivalent) or 37.5p a week for married couples (roughly a quarter of today’s basic state pension in real terms). Only workers earning less than £31.50 per year and of ‘good character’ could become entitled to the pension.

Personal provision was essential even then

The level of benefit was deliberately set low to encourage workers also to make their own provision for retirement. The need for personal provision remains today, which is why the Government is also introducing the National Employment Savings Trust for all employees who do not have access to an occupational pension (although they can opt out). Today, the basic state pension is worth about £102 per week for a single person or £163 per week for a married couple – clearly not sufficient to live on comfortably, so it is important to ensure that you have adequate private provision either via an employer’s scheme or a personal pension. Those who fail to make adequate provision could find themselves with insufficient income when they come to retire.

Covering the delay

Those who previously had no intention of working beyond age 65 (or even 60 for women) now face the prospect of working much longer before they receive their basic state pension. A key advantage of private pensions is that they are available when you want to retire, rather than when the Government says it can afford to start paying you an income. By managing your own retirement plans effectively, the basic state pension can become the ‘icing on the cake’ with the main retirement benefits coming from your own (or an employer’s) pension plan.  It is important to seek independent financial advice before making any decision regarding your finances. The value of investments is not guaranteed; you may get back less than you put in.

For specialist pensions advice and retirement information contact the Financial Planning Partners Ltd.