Filling The Gap As State Pension Age Increases For 6 Million More

September 2017
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The announcement that the State Pension age is to increase to age 68 by 2037/39 will affect those aged between 39 to 47 now, who could previously expect their State pension at 67.

This group are potentially amongst the worse off when it comes to retirement funding. Many of them are too young to have benefited much from employer sponsored defined benefit pension schemes, which were being phased out when they started working. (See our Generation X article).

Neither will they benefit, as much as their younger colleagues, from auto-enrolment pensions which did not start till they were in their 40s. Although younger workers may expect 68 to become 69 or 70, as the Government is seeking to make the State pension affordable over the long term, in the light of increasing life expectancy.

If you are facing an increase in your State retirement age but don't expect to be able to work that long what can you do?

  • Make sure you will get a full State pension when you reach age 68. State pension entitlement depends on your national insurance record. 35 years of contributions are required to be eligible for the full State pension of £159.55 per week. To check whether you are on course for this obtain a state pension forecast here:

If you have shortfalls in funding the State pension you may qualify for additional credits if you are:

  • A non working parent, who is caring for children and receiving Child Benefit. If you have given Child Benefit up, due to the tax payable on it for high earners, you can still claim credits for your State pension. (See our Non Working Adults article)
  • A carer of an adult and in receipt of Carers Allowance.
  • Looking for work and claiming Jobseekers Allowance.

If you have gaps in your NI record for other reasons and cannot make these up through future years of employment, you may wish to pay voluntary class 3 contributions. These usually offer good value for money. An estimate of the cost of doing so can be obtained from the Government once you have your State pension forecast.

What if you want to retire before age 68?

This is still possible as while you may not receive a State pension till age 68, you can access private pensions 10 years earlier than your State retirement age. Other savings, such as ISAs have no age restriction and can produce a tax free income at any time.

Saving more now may be the answer. If you are employed, earning more than £10,000 per year, your employer will be obliged to offer you an auto-enrolment pension into which they match your contributions. Many employers offer more than this statutory minimum funding which is planned to increase from 2018/19. Employer payments into your pension are tax and national insurance exempt and any contributions made by you are topped up with tax relief at 20% by the Government. Higher and top rate taxpayers can reclaim the additional relief due via their tax return, bringing the net cost down to £60 or £55 for every £100 saved. Joining your employer’s scheme is likely to offer you the best chance of retiring earlier. Private pension top ups can also be made by you.

Self employed individuals can also pay into personal pensions and get these tax breaks on their savings.

Non-earners are also eligible to pay in up to £300 per month or £3,600 tax year and will automatically qualify for 20% income tax, even if a non taxpayer. This reduces the cost of every £100 saved to £80. This top up is automatic, if the payment is made to a personal pension or stakeholder plan where the provider funds the tax relief up front and collects it from HMRC.

This is available from age 0 to 75. Parents and grandparents worried about the future retirement expectations of their offspring can fund their pension plans or fund a pension for a non working spouse or partner.

Pensions are taxed on withdrawal of funds, with 25% of the accrued fund payable tax free, and the income taxable at the rate payable by the plan owner when it is withdrawn. The overall limit on pension savings is £1 million per person, index linked from next year. No tax is paid on the fund while it is growing.

An Individual Savings Account offers no upfront tax relief on money saved but like a pension plan, no tax is payable on the growth in the savings. When income or capital is withdrawn from an ISA, which can be at any age, it is completely tax free. The allowances for ISA saving this year are £20,000 for adults and £4,128 for under 18s.

Today’s 40 somethings should not assume that they have to work till they drop or that they cannot retire sooner than age 68. Starting to save more now, could enable earlier retirement using pensions and ISAs to fill the gap.

Kay Ingram
Director of Public Policy, LEBC

Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. Tax planning is not regulated by the Financial Conduct Authority. Tax rates and allowances may change in future.

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