How to protect your retirement fund from the rising state pension age

Millions of retirement plans hang in the balance under government proposals to increase the state pension age to 68 earlier than planned.

Ministers want to overhaul the age at which pensioners receive state support, to raise the Treasury tens of billions of pounds. The state pension age is currently set at 66 and is in the process of rising to 67. It is legislated to rise again to 68 between 2044 and 2046, but ministers are considering plans to accelerate this by around a decade. 

Almost nine million workers will be forced to wait longer for their state pension if the plan goes ahead, according to estimates from the pension specialist Just Group. 

It risks pushing swathes of people into poverty, with those currently in their mid-50s having to wait a year longer to receive their pension. 

Last year the Institute for Fiscal Studies, a think tank, warned that raising the state pension age from 65 to 66 had already doubled income poverty rates among those approaching the threshold. It estimated one in seven 65-year-olds have been pushed into income poverty as a direct result. 

Sir Steve Webb, former pensions minister and a partner at consultancy LCP, said: “For people who are fit and healthy, it will just mean working for another year and perhaps rejigging your retirement plan. 

“But there is a growing group of people who will need to rely on working age benefits if they get their state pension a year later. And if your life expectancy is low, say ten years after state pension age, then pushing it back by a year is akin to losing a tenth of your lifetime pension.”

More than 12 million retirees paid the state pension will get a record 10.1pc increase in their income this year thanks to the triple lock remaining in place. 

While the state pension may not be falling in value, it is getting further out of reach. But an increasing state pension age need not derail your retirement plans, if you take steps to mitigate the change now. Here is how to protect your finances and prepare for the change.

Put together a cash flow

This is a simple, but crucial, starting point. Sir Steve said: “You can’t start to plan for retirement until you have an idea of what income you will have for the remainder of your life and how much you will need to live off. 

“It’s important to remember that 68 will be the state pension age, but not necessarily retirement age. You may stop working before or after that age and that will have a big impact on your plan.” 

A financial plan can help identify potential bumps along the road and should be updated regularly to take account of investment returns on savings, inflation, taxation and changing personal circumstances.

Make your workplace pension work for you

Contact your private pension provider to check when you can start withdrawing from the pot if needed. 

The earliest is usually age 55, although this will rise to 57 from 2028, and so it is possible to start drawing a private pension before you reach state pension age, even while you are still working. 

Workplace pensions can be surprisingly flexible if used sensibly. It is possible for savers to make a few larger withdrawals before the state pension starts to fill any income gaps, and stop or reduce withdrawals once they reach state pension age.

Once you have passed your 55th birthday you can take a quarter of your personal or workplace pension pot without paying tax. This can be as a lump payment or smaller instalments adding up to 25pc. 

Be wary of tax implications if you withdraw a bigger slice of your pension pot – it could push anyone still working into a higher tax bracket.

Top up the minimum contribution

The minimum an employee can contribute to a workplace pension is currently 5pc of qualifying earnings, and employers must pay at least 3pc. 

But putting as much into your pension as you can afford while still working – not just the minimum – will help to protect against any bumps in the road before you reach state pension age. Some employers will match additional contributions, boosting the value of your savings even further.

The self-employed can invest in a private pension in lieu of a workplace pension. The amount you can contribute into your pension is capped at an annual allowance of £40,000, or 100pc of your earnings, if lower. 

If employee and employer contributions combined breach the £40,000 cap, an annual allowance charge is triggered. You can only pay more than this in a tax year if you have unused allowances which can be carried forward from the three previous tax years. 

Tax relief on personal and third-party contributions is normally limited to 100pc of your relevant UK earnings each tax year.

Start early

The effect of compound investment returns over a longer period, as well as additional amounts paid in over time, means that the sooner you start saving, the less it will cost you to retire early. 

Familiarise yourself with your pension early on in your career to make your hard-earned money go further.