A reader is troubled by the progressive rise in when the state pension is paid out
Thursday 15 Oct 2020 Author: Tom Selby

I’m confused about the state pension. I know the state pension age has just increased to 66 but I’ve read stories that it could be about to go to 75. How on earth can anyone know what they will get and when?! Can you help please?

Anonymous


Tom Selby, AJ Bell Senior Analyst says:

You are right that the state pension age increased to 66 from 6 October 2020. However, there are no plans to increase the state pension age to 75 – this is a common mistake based on a proposal from a think-tank
called the Centre for Social Justice in 2019.

The state pension age is due to increase to 67 by 2028 and 68 by 2046 – the Government has proposed bringing this increase forward to 2039 but has yet to pass the relevant legislation. Future changes beyond this time will likely be dictated by the extent to which average life expectancy improvements in the UK continue. You can check your personal state pension age here. 

Anyone retiring from 6 April 2016 onwards will receive the ‘new’ state pension, which currently pays £175.20 a week – roughly £9,000 a year – and rises each year in line with the ‘triple-lock’. The latter is a guarantee to increase its value by the highest of average earnings, inflation and 2.5%.

To qualify for the full state pension, you’ll need to build up a 35-year National Insurance contribution record and be a UK resident.

If you build up state pension rights under the ‘old’ system (i.e. before 6 April 2016) these will be reflected in whatever you receive under the new system.

Although the state pension provides a good starting point for your retirement, the income will fall well short of many people’s aspirations.

And while automatic enrolment reforms are helping get more workers saving something in a private pension for the first time, minimum contribution levels are low (8% of earnings) and millions of people, including self-employed workers, are not included.

The Pensions and Lifetime Savings Association, a trade body, suggests someone wanting to enjoy a ‘moderate’ retirement lifestyle might need around £20,000 a year in income, while someone wanting a ‘comfortable’ retirement could need £33,000.

Around £9,000 of this can be delivered by the state pension, but anything beyond that is down to you (and your employer if you are in a workplace scheme).

To give you an idea, you might need a pot worth in the region of £255,000 to generate an income of £11,000 a year that would last for 30 years in retirement (assuming 4% annual investment returns post-charges), taking you to the £20,000 ‘moderate’ target. Based on similar assumptions, the ‘comfortable’ goal might require over £550,000.

Don’t be put off by the big numbers involved – focus instead on saving as much as you can afford as early as possible, investing for the long-term and keeping your costs as low as possible.


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