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December 2, 2011 6:04 pm
Millions of pension savers will need to increase their contributions if they wish to retain control over when they retire, advisers warn, following news that the state pension age (SPA) is to rise to 67 much faster than expected.
Under a policy announced by George Osborne during his autumn statement, the earliest age at which an individual can claim the state pension will rise from 66 to 67 from 2026 – a decade earlier than planned.
As a result, millions of people in their early 50s will have to wait an extra year to claim the basic state pension, which is currently worth around £5,000 a year – forcing many to work longer or use savings to plug the gap.
However, under a special exemption announced by the chancellor, anyone within 14 years of receiving a state pension today can still claim it at age 66.
The Treasury said the decision to speed up the rise in the SPA to 67 was in “response to changes in demography”. But the measure will also save the government about £60bn in today’s prices between 2026-27 and 2035-36.
Millions of pension investors could see their funds invested in infrastructure projects, under a proposal being mapped out between the government and the pension industry, writes Josephine Cumbo.
In his autumn statement, the chancellor said the Treasury had signed a memorandum of understanding with the National Association of Pension Funds (NAPF), whose 1,200 public and private scheme members have £800bn in assets, and the Pension Protection Fund (PPF), which has assets of more than £6bn, to help set up a new platform to promote investment in infrastructure.
“They need a simpler financial vehicle that helps them to get on board with bricks and mortar,” said Joanne Segars, chief executive of the NAPF.
“The UK desperately needs to update its infrastructure, and pension funds are looking for inflation-linked, long-term investments. This could be win-win”.
Some analysts said infrastructure investment could benefit pension savers.
“At the moment, these huge pools of long-term assets are being encouraged to pile into gilts,” noted Dr Ros Altmann, director-general of Saga, the over-50s financial services provider. “But gilt yields are at record low levels and do not offer sufficient returns even to keep up with inflation, let alone to keep up with rising pension liabilities. Therefore, pension funds urgently need new ways of earning good income.”
Further changes have not been ruled out. “Future increases in the SPA will also be based on demographic evidence and the government will discuss further the process that could be put in place to allow the views of interested parties to be considered,” the Treasury added.
This week’s announcement comes soon after the government brought forward the planned increase in the SPA to 66 to 2020.
As a result, the SPA will jump by two years – from age 65 to age 67 – in the space of just seven years.
“At this rate, then someone in their early 20s today will not receive their state pension until age 71,” projected John Lawson, head of pensions policy at Standard Life, the pensions provider. “Someone aged 40 today will have to wait until they are 68 before they receive their reward for a lifetime of work or caring.”
He advised anyone needing to retire at age 65 to build up additional savings. “People who want to take control of their own retirement age need to start a savings plan so that they can draw their income when they want.”
Standard Life calculated that someone aged 22 today would be able to secure a retirement income of £102 a week between the ages of 65 and 71 by saving £23.50 a month from now on.
While individuals in their 50s and below have been given at least 15 years to plan for this second increase in the SPA, advisers say those approaching retirement should still seek specialist advice on how to make the most of their savings.
“For instance, if people are retiring later in life, they are more likely to qualify for an enhanced annuity when they eventually do retire, which makes a significant difference to the income they will receive for the rest of their life,” explained John Perks, managing director of retirement solutions with LV=, the pensions provider.
“People should also make sure they consider all their assets when looking at how to fund retirement, including their property, which is often people’s biggest asset,” he added.
LV= is urging the government to provide stability with pension legislation, allowing people to plan for retirement with a “degree of comfort”.
For a calculation of when you can start drawing on the state pension see www.pensionsadvisoryservice.org.uk
Revised state pension age guidance
People born on or after 6 April 1960 but before 6 April 1961 will have an SPA between 66 and 67
People born on or after 6 April 1961 will have an SPA of 67 or higher.
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