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Don’t be caught by state pension delays

Ed Monk

Ed Monk - Fidelity Personal Investing

A large group of women born in the 1950s have just been given the bad news that their efforts to fight delays in their state pension have been rejected by the High Court.

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These women - as many as 3.8m - have seen the age at which they are entitled to a state pension rise from 60 to as high as 66 in some cases. The increases have been imposed by successive governments and for different reasons. Many other people are also affected, but none as much as this group of women.

The case heard last week argued that the increases were not communicated properly, meaning many have been forced to tear up their plans for retirement at short notice and work many years beyond their expected retirement date. 

The first plans for increases in state pension age for women were made in 1995, when a process of equalising the retirement ages of men and women began. Before then women had been able to get their state pension at age 60 but this was gradually raised in stages until 2018, when the state pension age for both men and women reached 65.

But further increases for both sexes were confirmed in 2011, meaning some women had to wait even longer. Campaigners have argued that the double-impact of the increases in 1995 and 2011 have fallen disproportionately on this group of women, many of whom will have suffered gaps in their state pension entitlement already because they had taken time out of work to care for children or relatives.

The case may have further to run, with an appeal against the ruling expected. The episode underlines the importance of the state pension - and of knowing exactly when you should expect to receive it.

What will you get - and when?

The state pension is the backbone of most retirement plans - the money is guaranteed and will form the bulk of retirement income for most people. The current full state pension is £168.60 a week - or £8,767.20 a year.

To get the full entitlement you need to have made National Insurance (NI) contributions for 35 years, either from working and paying NI, or through NI credits that can be claimed if you cannot work - for example because of illness or disability, or if you’re a carer or you’re unemployed.

You can check what state pension you’re in line for by using this government tool.

The tool will also tell you at what age you will be able to claim your state pension - vital information for making your retirement plans.

Saving for yourself - and how much?

Most of us will hope to retire with more than just the state pension to rely on and a private pension - either through a workplace scheme of a personal pension such as a SIPP (self-invested personal pension).

If you wanted an income from a private pension that equalled a full state pension, how much would you need to have saved?

One way to answer that is to look at the income provided by an annuity, the product that takes retirement savings and converts them into a guaranteed income for life. Based on current annuity rates, a 65-year-old buying an income that rises with RPI inflation would need pension savings of about £321,000 to recreate the income from the full state pension.1

Annuities are not the only way to get an income from retirement savings. Income drawdown allows you to leave your money in your pension pot and take income or lump sums from it as and when you want. Any money left in your pension pot remains invested, which may give your pension pot a chance to grow, but it could go down in value too.

How much you can withdraw sustainably in Income Drawdown depends on a range of factors, including investing returns, but a rule of thumb based on Fidelity’s research is that 4% - 5% a year represents a level that means your savings have a good chance of lasting for 25 years. 

Based on that, pension savings of almost £175,340, with withdrawals set at 5%, would be required to recreate the current annual full State Pension.2 
 

Getting you retirement savings ready

If you are saving for yourself inside a pension it can make sense to bring all your personal pensions, including from previous employers, together in one place inside a SIPP. This will give you the ease of viewing and managing your pension money online and increasing your contributions to keep your plans on track. A SIPP might cost you more or less than your old pension schemes, so it’s important to consider the charges you’re paying on your old funds and compare this to the charges if they are held in one place. 

Make sure that you check the details of your old schemes before you give them up. An old scheme might allow you to take your money earlier, for example, or will perhaps allow you to buy a higher income in the future via a ‘Guaranteed Annuity Rate’. If an old scheme includes such features, consider whether you will lose out by giving them up.

The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944.

Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

More on pensions

Source:
1Based on an annuity rate of 2.73%
2Fidelity, October 2019

Important Information: The value of investments and the income from them can go down as well as up so you may get back less than you invest. Pension transfers are a complex area and may not be suitable for everyone. Before going ahead with a pension transfer, we strongly recommend that you undertake a full comparison of the benefits, charges and features offered. Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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