What does the rising state pension age mean for Brits’ retirement plans?

•    From 6 October 2020 the UK state pension age for men and women will rise to 66:
o    Anyone born after 5th October 1954 will have a state pension age of at least 66
o    Plans previously announced will then see the state pension age rise to 67 by 2028 and 68 by 2039
•    Even when combined with automatic enrolment people risk falling short of their retirement aspirations:
o    An average UK earner (earning £30,000 a year) saving in a pension at the auto-enrolment minimum for 30 years risks falling over £100,000 short of a ‘moderate’ retirement income
•    Decline of guaranteed ‘defined benefit’ pensions and receding of state provision means onus increasingly on individuals – but many people are unaware of the generous benefits of pension saving:
o    73% of people don’t realise you can currently access private pension savings at age 55
o    78% of people don’t know that you get 20% basic rate tax relief on money paid into a pension
o    83% of people don’t appreciate that you can normally withdraw 25% of your pension tax free 

Tom Selby, senior analyst at AJ Bell, comments: 

“State pension provision is only moving in one direction in response to rapidly rising life expectancy in recent decades. Since 2010 we have seen the state pension age equalised for men and women at 65, before increasing to 66 for all between 2018 and 2020.

“That is unlikely to be the end of the story, however. Plans are already in place to increase the state pension age to 67 by the end of this decade and then 68 by the end of the next decade. Furthermore, if average life expectancy continues to increase the state pension age will inevitably follow suit. 

“This means younger savers probably need to plan assuming they might not reach their state pension until 70 or even beyond.

“Anyone who aspires to more than the bare minimum in retirement needs to take responsibility as early as possible to build their own retirement pot. 

“However, far too few are doing this at the moment, in part due to apathy and perhaps a misguided assumption that auto-enrolment at the minimum will be enough, but also in many cases due to ignorance about the benefits of pension saving.  

“For example, almost three quarters (73%) of people don’t know you can access your private pension savings from age 55, while less than a fifth are aware of the availability of tax-free cash. Tackling this knowledge deficit through better communications could go a long way ensuring millions of people avoid disappointment in retirement.”

Where will auto-enrolment and the state pension get you?

“The Pensions and Lifetime Savings Association (PLSA), a respected industry trade body, set out some simple retirement income targets via its ‘retirement living standards’. 

“Roughly speaking, the PLSA standards say a single person will need a total retirement income of £10,000 to enjoy a ‘minimum’ standard of retirement, £20,000 for a ‘moderate’ standard and £33,000 for a ‘comfortable’ retirement. 

“For London, the figures are approximately £12,000, £24,000 and £36,000.

“For couples, the minimum figure is £16,000, moderate £29,000 and comfortable £48,000. In London, these numbers are around £20,000, £33,000 and £49,000.”

You can read more about the Retirement Living Standards and the assumptions used here: https://www.retirementlivingstandards.org.uk/

What size fund might someone need to achieve a minimum, moderate or comfortable retirement?

“The first port of call for most people remains the state pension, which based on receiving the full flat-rate amount pays an income of just over £9,000 a year (£175.20 per week).

“For a single person, that points to their private pension needing to deliver an income of around £1,000 to achieve the PLSA minimum standard of living (£10,000 a year), £11,000 for moderate (£20,000 a year) and £24,000 for comfortable (£33,000 a year).

“How much money you need saved to achieve those goals will depend on a number of things including your age, wealth and health.

“If we assume a single person wants to stop work entirely when they reach state pension age (assumed at 66), receives the full flat-rate state pension and has no underlying health conditions, they might need a private pension worth around**:

•    £23,000 to generate the £1,000 extra annual income needed to enjoy the minimum lifestyle
•    £255,000 to generate the £11,000 extra annual income needed to enjoy the moderate lifestyle
•    £555,000 to generate the £24,000 extra annual income needed to enjoy the comfortable lifestyle

**fund exhausted after 30 years, income tax/tax-free cash not taken into account, assumes 4% real annual growth post-charges and retirement income rises each year in line with 2% inflation

Minimum auto-enrolment contributions often aren’t enough to reach the £255,000 pot size required for a moderate lifestyle outlined above:

Assumptions: wages rise in line with inflation; annual investment growth of 4% post-charges; contributions based on total salary (i.e. band of earnings ignored)