Fortysomethings stand to lose around £10,000 due to the state pension age hike to 68 – but shrewd savers can cut that dramatically by topping up investments now.
If you are in your mid-40s, it will cost you £3,340, or £21 a month if you set aside money gradually, to build up an extra £10,000 lump sum before you hit the new state retirement age. That assumes 5 per cent investment growth, net of fees, over 22 years.
The Government announced last week it was bringing forward a rise in the state pension age to 68 by seven years. That means the increase will happen in 2037-2039 – not 2044-2046 as originally planned – affecting everyone currently aged 46 or under.
Shortfall: Fortysomethings stand to lose around £10k due to the state pension age hike to 68
Some 7.6million people currently between the ages of 39 and 47 will have to work a year longer under the plans, and the faster timetable will save the Government around £74billion, according to House of Commons Library analysis.
The move is part of a series of changes aimed at bringing women’s state pension age into line with men’s, and taking account of everyone living longer. Read more in our guide here and see the box below.
The basic state pension is £122.30 a week, and the new full ‘flat rate’ state pension introduced for people retiring from April 2016 onwards is £159.55 a week
This is Money calculated how much you would need to invest now to make up a shortfall of roughly £10,000 by the time you are 68, using our monthly or lump sum savings calculator.
The results if you are aged 46 now, and either invest a lump sum at the outset or save regularly for 22 years, are below. We allowed for relatively conservative investment growth of 5 per cent. The calculator assumes interest is calculated and compounded monthly.
We also calculated how much you would need to invest now if you are 39 and due to start drawing the state pension in 29 years time. It will cost you £2,360, or £12.90 a month, to build up an extra £10,000 lump sum.
If you are not currently getting full matched pension contributions from your employer, it could cost you even less if you take the opportunity to exploit that perk to the maximum.
Our calculations also don’t take into account the extra tax relief you would get from the Government if you top up investments via your pension, which will help claw back the state pension loss too.
WHEN WILL YOU GET A STATE PENSION?
The age at which women qualify for the state pension is in the process of rising from 60 to 65 by November 2018, with the exact date depending on the month you were born.
Between October 2018 and October 2020, both men and women’s state pension age will increase to 66. And between 2026 and 2028, it will rise again to 67.
The Government has now announced that between 2037 and 2039, there will be a further rise to 68. Read more here.
Labour has attacked the Government’s move to hasten a rise in the state pension age to 68, citing a recent report suggesting massive gains in life expectancy over recent decades are grinding to a halt.
Debbie Abrahams MP, Labour’s Shadow Work and Pensions Secretary, said: ‘The latest research on life expectancy, published days ago, shows that there is no evidential basis for bringing the state pension age further forward.
‘That’s why Labour want to take a measured approach, leaving the state pension age at 66 while we review the evidence emerging around life expectancy and healthy life expectancy, considering how we can best protect those doing demanding jobs and the contributions they have already made.”
But Conservative Work and Pensions Secretary David Gauke estimated Labour’s plan to cap the state pension age at 66 would cost taxpayers £250billion by 2045, and challenged the opposition party to explain how it would pay for its policy.
A Department for Work and Pensions spokesperson said: ‘These changes will ensure that the state pension is both fair and sustainable for future generations and in line with continuing rises in life expectancy.
‘Those affected will on average still receive the state pension for longer than the generations before them.’
HOW MUCH IS THE STATE PENSION?
The basic state pension is £122.30 a week. It is topped up by additional state pension entitlements – S2P and Serps – accrued during working years.
That two-tier system has changed for people retiring since 6 April 2016, when it was replaced by a new ‘flat rate’ state pension. This is worth £159.55 a week.
However, people who have contracted out of S2P and Serps over the years get less than this.
Workers needed to have 30 years of qualifying National Insurance contributions to get the old state pension, but they now need to have 35 years of contributions to get the new flat rate state pension.
But even if you paid in full for a whole 35 years, if you contracted out for some years on top of that it might still reduce what you get.
Everyone gets the option of deferring their state pension to get more in their later years. You can check your NI record here.