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Baby Boom or Bust?

The so-called "Baby Boomer" generation is starting to approach retirement age and many can remember when they started work in 60’s the well-worn phrase that insisted that The Welfare State would take care of them – "from the cradle to the grave." Hollow words in today’s financial environment.

We are also living longer and the downside of this is that our pension plans have to last longer. For the Basic State Pension, this has particular importance, given the parlous state of public finances in the wake of the credit crunch and recession.

With extended life expectancy and a falling birth rate, the ‘support ratio’ that is the number of people working and paying National Insurance Contributions compared with the number of people eligible to claim state benefits, such as pensions, is falling. Or put another way more workers (unlikely) or higher taxes are necessary to support the State Pensions at current levels, of those in retirement and living longer.

Add to this the fact that we taxpayers have had to pour billions of pounds into the banks to pay for their irresponsible lending and investment strategies and it is clear that the Basic State Pension is rapidly becoming unaffordable. This is why, from next year, the state retirement age for women will gradually start rising from 60 to 65.

It is also why the Government has already announced that the State Retirement Age for everyone will then have to rise (in stages) from 65 to 68 between 2024 and 2044. What’s more some politicians now believe that the rise to 66 will have to happen even earlier, to help balance the nation’s books.

Does this really matter?

This change will start to affect people more quickly than they may imagine. On the best timetable, anyone now aged 51 or 52 will be ‘caught’ by the higher State Retirement Age. But for most people (at least those reading this website) it is likely that the Basic State Pension will form only part of their retirement income with the balance being provided by an Occupational or Personal Pension.

However, except for those lucky enough to be in one of the few remaining ‘Final Salary’ (also called Defined Benefit) pension schemes (that do not close in the meantime) the Company or Personal Pension they build up will have to last longer than was expected at the time they started planning. That (together with low interest rates) is why annuities are more expensive than a decade or so ago and a given pension pot secures a lower income than was once the case.

So where does that leave us?

Unfortunately, this means that not only will most people have to make do with a smaller income than expected, but they will also have to wait longer for part of it. And with the Basic State Pension currently being worth just under £5,000 for a single person, that represents a quarter of the entire retirement income of a man who had built up a pension fund of about £220,000, by age 65.

By having to wait a year or more longer, the situation is simply exacerbated.

What can we do?

The best solution is to take advice and then start planning to ‘fill the gap’. This can be achieved in a number of ways including increasing your pension contributions, to making better use of the Individual Savings Account (ISA) limits that were increased to £10,200 each for the over 50s last October and for everyone else in April 2010.

And don’t forget

… if you are between 50 and 55 now, you need to decide whether you wish to start taking pension benefits before next April, when the minimum age for taking benefits from any pension will rise to age 55.

It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact your usual independent financial adviser. The value of investments is not guaranteed; you may get back less than you put in. . If you would like any assistance, please contact us.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.

Andy Rzysko - Director