Will you have to work beyond retirement age?

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.

Some people may have to work longer

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. So 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.

Putting more aside now is an option

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 much less (£21,000 a year) 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 the over 50s that cuts in on 6th October 2009. This would enable them to draw the additional £10,000 each year for three years, if necessary.

It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact your independent financial planner. The value of investments is not guaranteed; you may get back less than you put in.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND. 

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