Mind the gap!
Having worked for most of your life, the state pension has probably always seemed a lifetime away but is still, quite rightly, seen by many as a key element of retirement income; a dependable income source that forms the basis of most retirement planning.
But now, those within touching distance of finally receiving something back from all the taxes and National Insurance contributions they’ve paid all their lives are finding the state pension age is shifting further and further away. Women planning to retire at 60 have found themselves waiting years longer… men who thought 65 was late are now being told of further delay. One can’t argue with the gender equality over the state pension age, but for many clients, their desired retirement age hasn’t changed. They don’t want to work longer but do need some form of income to ‘plug the gap’ between when they actually retire and when they’re entitled to claim the state pension.
The best planning is often the simplest, but unfortunately we’re hearing of many people with no plans at all; instead simply eroding their savings to pay the bills. For many, the ‘gap’ will be five to ten years. Considering a typical state pension is between five and nine thousand pounds a year, that creates a deficit of between £25,000 and £90,000 in an individual’s planning. Double that for a couple.
In your first years of retirement, it’s likely you have better things to spend your money on than providing yourself a short-term substitute wage. Gone are the days where a pension was the only retirement planning to put in place. We are now finding that a vital part of long-term financial strategy is to plan ahead with the aim of generating a large short-term income for this interval.
Considering private pension plans are limited to providing a longer term income, we often find our clients need less restricted savings vehicles to fit this short term need. ISAs, onshore bonds, fixed savings and direct investments can all be considered alongside the more complex arrangements such as VCTs, EISs and structured products to provide you with a shorter term income stream to support and supplement any private pensions you have, without simply eroding your wealth before you claim the state pension. As with all financial planning, the earlier you start planning ahead, the better positioned you will be in the future.
Naturally, the state pension is a popular toy for governments to play around with at election time, so it’s unlikely that this is the end of the changes. As you’re probably aware, the pension age is just the start. With the ‘flat rate’ state pension proposals being drafted… and re-drafted, we’re likely to see many more changes, then perhaps it will start-over should there be a change in office.
Once the final legislation is released about the flat rate, we’ll be able to comment. For now, we’re aware that the calculations are complex and confusing and, like you, only hope and wait for some clarity, fairness and common sense to be put into the system before it’s all officially announced, and with enough time for us to help our clients plan ahead.
By Clare Bruce AFPS, Chartered Financial Planner for Guardian Wealth Management UK.