Don’t bet on getting a state pension

We should congratulate shadow chancellor George Osborne for coming clean on the parlous state of the UK’s finances at the Conservative Party conference. At least he hinted at the tough measures needed to put things right.

Osborne claimed yesterday that, under a Conservative government, the retirement age for collecting a state pension will rise to 66. That is one of several measures designed to deal with a mounting budget deficit, expected to hit at least £175bn this year. That eye-popping sum is Gordon Brown’s leaving gift to the nation after more than a decade of profligate state spending.

However it’s also the thin end of the wedge for private-sector pension savers. Sure, Osborne says he won’t introduce the change until 2016, when it is expected to save the government around £13bn a year.

But who knows? If the Conservatives take power, they may need to act quicker to reduce the UK’s debts.

And one thing looks clear – the state pension, taken as read by many of us, is no longer a guaranteed safety net in retirement. At around £95 a week, it is already one of the lowest in the EU. It could easily be reduced further before many of us reach retirement.

One way of doing this by stealth is to not link it fully to changes in the rate of inflation. Another is to gradually push back the age at which we can all claim it – once we get used to the retirement age being 66, what’s to stop it rising to 67, 70 or even 100? And who’s to say whether one day we’ll get any state pension at all?

So, more than ever, it pays to make your own provision for retirement.

That’s tough. If you want an inflation-linked income of, say, £20,000 when you reach 65, you’ll need a pot worth just over £450,000 at retirement, according to Hargreaves Lansdowne – see their pension annuity best buy tables for more.

The key is to start as early as possible, make regular contributions so that you get used to the monthly reduction in your net income, and maximise your tax breaks.

Using your annual Isa allowance is a no brainer – that’s up to £7,200 protected from tax, or £10,200 for the over 50’s. On top of that, higher rate taxpayers still get 40% tax relief on every £1 contributed to a personal pension, and with a self invested personal pension (Sipp) you at least get to dictate where it’s invested.

So sure, pension planning is pretty boring. But it’s never been more important.