The state pension drifts further away

Millions of Britons born between 1970 and 1978 will have to wait up to a year longer than expected to claim their state pension benefits under proposals unveiled last week. The government intends to implement the recommendations of former Confederation of British Industry boss John Cridland, whose report into the expense of state pensions concluded earlier this year that the current projected costs were not sustainable.

This means that plans for an increase in the state pension age (SPA) from 67 to 68 – previously scheduled for introduction between 2044 and 2046 – will now come into effect seven years earlier, between 2037 and 2039. The reform will affect those currently aged between 39 and 47 (around six million of them), saving the government an estimated £74bn by 2045/2046. Today, the state pension age stands at 65 for men and 64 for women, but is due to increase gradually over the months and years ahead. Men and women will see their state pension age equalised at 65 in 2018, but this will rise steadily to 66 by 2026 and to 67 by 2037. Thereafter, the latest announcement will begin coming into effect.

While the changes have been criticised by the Labour Party, as well as charities that work with older people, ministers argue that the cost of state pensions, allied to demographic changes such as increased life expectancies and the ageing population, mean reforms cannot be avoided. The changes would ensure that the average Briton would continue to spend around 32% of their lives in retirement, according to figures from the Department of Work and Pensions.

The changes mean that many 40-somethings will have to wait longer for their state pensions, but it is important to recognise that the SPA is not the age at which you are allowed to retire – you can currently access your private pension from the age of 55. However, this could change. As Richard Dyson notes in The Daily Telegraph, the government has indicated in the past that the minimum pension age could remain “ten years below the SPA”. So look out for moves on that front.

Don’t panic: there’s still time to plan

Even those at the top end of the age range of people affected by the higher state pension age still have two decades to plan for it.

The key for savers will be to consider all their pensions in the round – state, personal and occupational – and then to assess how much they’ll need to hit their target retirement date, whether it is before or after age 68. That may mean planning for how you will do without state-pension income (worth a little over £8,000 a year in today’s money) in the years before you are entitled to claim it, including the extra year for those affected by last week’s announcement.

Investing extra today will certainly help – an extra £50 a month invested over 20 years would turn into more than £20,000, assuming an annual return of 5% – but there are other planning opportunities too. For example, income-drawdown plans allow savers to leave their money invested, earning additional returns, even after they have started drawing a regular income. It is also possible to keep paying into a drawdown fund once you’ve started making withdrawals – this could be useful for those moving from full-time into part-time work, rather than retiring all in one go.

More savers caught out by the lifetime allowance

The amount of tax paid by people whose pension pots get too big almost doubled last year, as increasing numbers were caught out by the lifetime allowance (LTA). The allowance, which caps the total savings you can have in your pension before a penal tax rate is charged on any excess, has fallen from £1.8m in the 2011-2012 tax year to £1m currently, following cuts in successive government budgets. In the 2015-2016 tax year, the most recent period for which data is available, HM Revenue & Customs collected £36m of tax from people who had breached the LTA, up 80% from the £20m collected in the previous year. In 2011-2012, just £12m of tax was raised this way.

Tax bills are calculated when savers start cashing in their pension funds, or at age 75, if this comes sooner. At that point, HMRC charges tax at 55% on any excess savings above the LTA. The LTA is not a contribution limit – it applies to the pot. In other words, if you are a particularly astute (or lucky) investor, you are more at risk of breaching the LTA than someone who saves the same amount as you, but has a slower-growing portfolio. It also makes it harder to plan for, given its dependence on your investment growth. But if you are at all concerned that you might breach the LTA, you should plan now for how to avoid it, by using alternative tax-efficient savings schemes such as individual saving accounts (Isas), for example.

Tax tip of the week

As of 6 April 2017 you can transfer up to £1,150 of your personal allowance (the amount you can earn in a year before incurring income tax) to your husband, wife or civil partner under
the “Marriage Allowance”, saving them up to £230 every tax year. In order to qualify for the tax break, you must earn less than your partner, and your income must be £11,500 or less. The higher earner must also be a 20% taxpayer – the allowance isn’t available to higher-rate taxpayers. You are still eligible if you are currently receiving a pension or live abroad (as long as you get a personal allowance). It’s also worth knowing that you can backdate the claim to include any tax year since 5 April 2015 in which you were eligible for the allowance.