There is some good news for anyone looking at their state pension entitlement. If inflation remains stubbornly high, pensioners could be in for a boost to their funds next April to the tune of almost £750.
This is welcome, but probably not enough if you are already struggling to manage on a pension, and certainly not enough to provide the kind of lifestyle most of us are looking for in retirement.
All thanks to inflation
The rise should come courtesy of the triple lock. This is the government commitment to raise the value of the state pension every tax year by the highest out of either the previous September’s inflation, average wage growth or 2.5%.
This year, it increased by 10.1 % in line with last September’s inflation rate, the biggest leap on record and The Bank of England has predicted that inflation will fall to 7% in the third quarter, which covers September.
But it might not be enough
But the projected increase will not mean that pensioners suddenly become a lot better off. The increases are lagging behind the large price rises which everybody, not just pensioners are having to deal with.
What’s more, another big rise may trigger debate over whether the triple lock should be scrapped, as it is reportedly unaffordable by the UK Treasury, which is already strapped for cash in the wake of the covid lockdowns.
It would be a very confident government that would antagonise a huge proportion of voters by scrapping the triple lock altogether, but solutions such as taking out the inflation element to make a triple lock, or increasing the age at which the state pension can be claimed have been debated in the past.
How much do you need?
The Pensions and Lifetime Savings Association has calculated that a single pensioner requires £23,300 a year of income to maintain a moderate living standard. Less than half (£10,600) currently comes from a full State Pension, and any increase in state generosity next year will only lag behind cost-of-living increases.
You need to find another £12,700 per year, and more than that if you live in rented accommodation. Having an adequate pension pot built up with an employer’s pension scheme or with a private pension plan is going to be essential for you.
Remember, if you retire at state pension age – currently 66 – you could easily have another 20 years of living to fund, based on average life expectancy, and many of us go on to live much longer than that. Factor in the likely rising costs of living over the next quarter of a century or so, and the potentially very high costs of care, and the need for a substantial pot of pension savings becomes all the more obvious.
Some more good news
Fortunately, building up the kind of pension pot that you want could be much easier than you might think.
There are a number of strategies you can use. Increasing your payments to an employer’s scheme through salary sacrifice can boost your pension considerably – and even more so if your employer agrees to match your contributions (salary sacrifice should be considered carefully as it may affect your level of borrowing when applying for a mortgage).
It can also be simple – and very rewarding – to set up a private pension plan if you have not already done so.
At Continuum we can help with your pension planning. We can start by looking at your current pension position and producing an illustration of the kind of pension and retirement income you could be looking at. Then, we can look at way to help your pension pot grow faster, and at ways to use if more effectively.
So for the good news you want to hear about your pension, call us at Continuum today.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.
Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.