Living to 100, Can you afford it?

Research released by the Department for Work and Pensions in January 2011 revealed that 10 million Britons can expect to reach the age of 100, representing 17 per cent of the total population. So what does that mean in reality? Firstly, employers are going to have to adapt working contracts to enable people to retire gradually and work to a later age. Secondly, we all need to take responsibility and save into our pensions for our own long term personal futures. Annuity rates, which pay our income in retirement, are likely to decrease as insurers feel the full force of an ageing population and the higher cost of providing an income for all those in retirement. This makes it more important than ever before to have a solid pension plan in place. The state will not be in any position of support, which means that we all have to make our own provisions for retirement income, or accept a much lower standard of living in later life. The best way to start planning is to decide how much you will need to live on each year in retirement. To provide a basic standard of living, a single person needs an annual annuity income of at least £14,000 before tax to avoid relying on the state. The next stage is to decide at what age you are likely to retire. The Government's new default retirement age is set to rise to 66 by 2020 and plans are in place for it to increase again to 68 between 2036 and 2046. A 30 year old starting a pension from scratch today would need to save around £330 a month to build up a pot of £288,660 at age 68. This would deliver, assuming 6 per cent fund growth after charges and 2.5 per cent inflation, an RPIlinked income of £14,000. If you start later, say at 45, you would need to save £890 a month to build up a pot of £315,315 at age 66, which would produce an RPI-linked income of £14,000 per annum, assuming the same growth and inflation as the previous example. Boosting your income in old age In order to boost your pension plan and supplement your retirement income, consider deferring your state pension. In return you will be rewarded with a boost to your income at a rate of 1 per cent for every five weeks you put off drawing it, which works out to be 10.4 per cent extra a year. Meaning a state pension worth £105 a week would be increased to £159.60 a week if you were to defer it for five years. Additionally, provided you give up your state pension continuously for at least 12 months, you can opt to receive a lump sum instead, which is equal to the amount you would have received in that time, plus interest, and have your state pension paid at its normal rate. Alternatively, you could take on your state pension and defer your private pension so as to build up a bigger personal pot. A person with a pension fund of £100,000 at age 65 could currently buy an RPI-linked income of £4,261, for example. But if you waited to draw on this until age 70 and paid a further £300 each month, you could expect an increased annual income of £7,145. You could also boost your income by downsizing your home and selling assets to free up cash. Choose wisely When buying an annuity, it is important to shop around and use the open-market approach, rather than simply taking the annuity rate offered by your pension provider, particularly if you are not in good health. Using the open market option can add a significant increase to a person's retirement income. The best retirement income plans are usually the combination of different things, including private, occupational and state pensions, investments, cash savings, property and a phased approach to retirement. To discuss how you can get the most out of your pension planning, please contact us for further information