Work and pensions secretary David Gauke’s announcement that the state pension age increase to 68 will now be phased in between 2037 and 2039 will dismay people who have factored the state pension into their retirement planning – but the remedy could cost as little as the equivalent of a daily cup of coffee.
Let’s assume that a 47-year-old had planned to receive a state pension of £6,500 in today’s terms when they turned 67, which means that there will be a funding gap of £10,651 in their retirement income plans in the first year of retirement (assuming that the state pension increases by 2.5% a year).
To fund this amount within a pension would require £357.68 gross to be paid each year into their pension, this assumes 4% net of charges growth. So for basic, higher or additional rate tax payers it will cost them £286.14, £214.61 and £196.72 respectively to plug this hole each year.
Or to put this another way, the daily cost will be £0.78, £0.59 or £0.54 depending on their tax bracket. This doesn’t seem as daunting as finding £10,651, does it?
Case study costs
But what about clients who haven’t planned for this scenario? Let’s look at a case study.
John works at a large company and is now facing his third state retirement age since he started working, when he began working the state retirement age was 65. He has recently turned 40 and hasn’t really factored in the state pension for his retirement planning, but he now is wondering: if he were to do this, what would it cost?
Assuming again, a state pension of £6,500 in today’s terms, and that he doesn’t want to wait until 68 to receive the equivalent of the state pension, what would it cost him to bridge this gap over three years in order to produce the equivalent of the state pension from 65 until 68 when his state pension will begin (assuming no further changes to his state pension age)?
Inflation-adjusted the assumed state pension would provide £12,050 at 65, £12,352 at 66 and £12,661 at 67. So a total amount of £37,063 will be required to bridge this state pension gap.
So as a daily cost to John after tax relief basic, higher and additional rate taxation would be £1.83, £1.38 or £1.26. An argument could be made that this daily cost would be less than buying a fancy coffee from a high street barista.
Although the increase in the state pension age has been a major headline grabber, and people may feel aggrieved by this change of state retirement age, the costs to the individual to remedy this are relatively low.
Mark Devlin is a technical manager at Prudential