If you're going to live to 100 – check your pension plan

Ten million of us will be centenarians – andas lives lengthen, retirement income is more important than ever
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Centenarians used to be a rare species, but the latest figures suggest the number of people who will live to see their 100th birthday is set to rise.

Life expectancy research released by the Department for Work and Pensions this month reveals that 10 million Britons can expect to enter triple-digit age, representing 17 per cent of the total population. This will include nearly 7,700 super-centenarians – those aged 110 or over.

But while spending at least one-third of your life in retirement may be good news, it also has a direct impact on the pensions system and is likely to affect the way consumers save for retirement in the years ahead. Alison Bailey, the head of policy at the Pensions Advisory Service, says both consumers and employers will be affected.

"There are two things that need to happen here," says Ms Bailey. "First, employers are going to have to adapt working contracts to enable people to retire gradually and work to a later age. Secondly, we all need to take more personal responsibility and save into our pensions."

Annuity rates, which pay our income in retirement, are likely to fall as insurers bear the brunt of an ageing population and the higher cost of providing an income for all those in retirement. This makes it more important than ever before to put a solid pension plan into place.

"It will not be possible to rely on the state in the future for anything more than a breadline income," says Martin Bamford of Informed Choice, an independent financial adviser. "This means that we all have to make our own provisions for retirement income, or accept a much lower standard of living in later life."

A good way to begin planning is to decide how much you will need to live on each year in retirement. According to independent studies from the Joseph Rowntree Foundation and the Cass Business School, a single person needs an annual annuity income of at least £14,000 before tax to avoid relying on the state.

The next step is to get an idea of what age you are likely to retire at. The Government's new default retirement age is set to rise to 66 by 2020 and plans are in place for it to increase again to 68 between 2036 and 2046. Figures from Hargreaves Lansdown show that a 30-year-old starting a pension from scratch today would need to save £330 a month to build up a pot of £288,660 at age 68. This would produce an RPI-linked income of £14,000 assuming 6 per cent fund growth after charges and 2.5 per cent inflation.

Late starters have even more work to do to catch up. A 45-year-old would need to save £890 a month to build up a pot of £315,315 at age 66, which would produce an RPI-linked income of £14,000 per annum.

However, reaching the £14,000 figure is by no means a guarantee for a secure retirement. Living costs will vary widely from person to person and from one generation to the next, so it pays to give yourself a wide margin when calculating your target lump sum.

Supplementing income in old age

All is not lost if you are unable to reach your target amount before the default retirement age, or your financial circumstances change, and there are ways to supplement your retirement income. First, consider deferring your state pension and in return you will be rewarded with a boost to your income at a rate of 1 per cent for every five weeks you put off drawing it – working out to 10.4 per cent extra a year. This means a state pension worth £105 a week would be increased to £159.60 a week if you were to defer it for five years.

As long as you give up your state pension continuously for at least 12 months, you can opt to receive a lump sum instead, which is equal to the amount you would have received in that time, plus interest, and have your state pension paid at its normal rate.

Alternatively, you can draw on your state pension and defer your private pension so as to build up a bigger personal pot. A man with a pension fund of £100,000 at age 65 could currently buy an RPI-linked income of £4,261, for example. But if he waited to draw on this until age 70 and paid a further £300 each month, he could expect an increased annual income of £7,145, according to Hargreaves Lansdown.

Other ways to boost your income include downsizing your home and selling assets to free up cash. But there is no guarantee that continuing to work will be an option, or that you will be in a position to sell either your home or other assets, so it is reckless to rely solely on these alternatives.

Experts also encourage making the most of any other savings vehicles such as individual savings accounts to offer an additional source of money to fund your retirement.

Choosing the best retirement product

When it comes to buying an annuity, the most important thing to do is to shop around and take what is known as the open-market option, rather than simply taking the annuity rate offered by your pension provider.

Research compiled by the pensions watchdog shows that exercising the open market option can add upwards of 17 per cent to a person's retirement income.

"The best retirement income plans are usually the combination of different things, including private, occupational and state pensions, investments, cash savings, property and a phased approach to retirement. Relying on one source of income in retirement is usually a bad idea," says Mr Bamford.

Pension payment fears

Many Britons are not opting into available occupational pension schemes, risking poverty and dependency on state benefits in later life, a new survey has revealed.

More than 400 small firms – those with no more than 250 members of staff – found that over 40 per cent of their employees had not registered with existing company pension schemes. The number was substantially higher among firms that offered stakeholder pension plans, according to a new survey by the Association of Consulting Actuaries (ACA).

Disillusionment with pensions, concerns over cost and a preference to spend were all perceived by firms as principal deterrents for their staff. But the ACA has warned that low investment in defined-contribution schemes could leave employees short of money at retirement.

The research showed that the average combined employer and employee contribution level for a defined-contribution scheme in a small firm ranged from 7.6 per cent to 9.3 per cent of earnings, substantially lower than for defined benefit pension schemes, where the number stood at 24 per cent.

Stuart Southall, the chairman of the ACA, said such low contribution levels put pension scheme members in danger of a shortfall when they reached retirement.

"Our survey has found that savings by both employers and employees into defined-contribution schemes generally have failed to increase in line with the cost of building a decent pension.

"Pension contributions into smaller firms' defined-contribution schemes probably need to double on average to at least 15 per cent of earnings if reasonable retirement incomes are to be achieved."

The small firms sector is the largest part of the UK private sector in terms of employment with 1.2 million firms employing more 60 per cent of the UK's private-sector employees and generating half of all private-sector turnover.

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