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
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.
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
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
To discuss how you can get the most out of your pension planning, please contact us for further information