Andy Burnham has signalled he is ready to scrap the earnings element of the state pension triple lock from 2030. Nothing is decided and with a huge backlash looming the triple lock might still survive, but it’s best to be prepared just in case.
What the triple lock change could mean
Even with the triple lock, the state pension is nowhere near generous enough to guarantee a comfortable retirement. The full new state pension is worth £12,547.60 a year, while many on the basic state pension get even less. Yet according to the annual Retirement Living Standards survey, a single person needs £13,900 a year just to meet a minimum standard of living, assuming they have cleared their mortgage and don't pay rent. A moderate retirement costs £32,700, while a comfortable one costs £45,400.
The triple lock increases the state pension each year in line with earnings, inflation or 2.5%, whichever is highest. Burnham has proposed dropping the earnings element, while somehow promising to ensure pensioners don't fall behind wages over the longer term. If the state pension had risen in line with average earnings since 2010, it would be around 12% lower, worth approximately £1,500 a year less, according to the Institute for Fiscal Studies. Future losses will depend on how quickly inflation and earnings grow.
Pensioners will continue to receive the existing triple lock until April 2030. After that, we just don't know. Even if the change goes ahead, the state pension won't fall, says Antonia Medlicott, founder of financial education specialists Investing Insiders. “It will continue to rise every year, just more slowly.”
Saving enough for retirement was difficult before, but now people need to raise their game. It won't be easy. Medlicott warns: “As a nation, we're not prepared for how much more needs to be put into private pensions.”
What to do if still of working age
The big advantage workers in their 20s, 30s and 40s have is time, but they mustn't waste it. Retirement may seem a long way off, but it will come around quickly, and the danger is that you act too late. Start by checking where you stand today.
Check your workplace pension. Make sure you're enrolled in your company scheme and understand how much you and your employer contribute. If you can afford to pay in more, check whether your employer will match those extra contributions.
Max out pension tax relief. Eligible pension contributions attract tax relief, subject to the rules and limits. For a basic-rate taxpayer, a £100 pension contribution can typically cost £80 out of take-home pay. Higher-rate taxpayers may be able to claim further relief.
Start early and stick with it. Someone who starts work at 22 on a salary of £30,000 and pays minimum auto-enrolment contributions could potentially build a £252,000 pension pot by 68 in today's prices, says Catherine Foot, director of the Standard Life Centre for the Future of Retirement. “Increasing contributions by three percentage points could allow them to retire at 62 instead, and with a slightly larger £270,000 pot.” Investment returns are never guaranteed.
Raise contributions with your pay. If you get a pay rise or bonus, consider putting some of it into your pension rather than spending it all.
Build an ISA too. Pensions offer upfront tax relief, but once you’ve taken your 25% tax-free cash, further withdrawals are generally taxable. Jason Hollands, managing director at investment platform Bestinvest, says: “ISA withdrawals are free of income tax and capital gains tax, so the benefits balance each other nicely. You can also access ISA money at any point.” Hollands adds: “When saving for retirement, a Stocks and Shares ISA should make your money work harder than a Cash ISA.”
Don't neglect cash savings. Build an emergency fund so an unexpected bill or spell out of work doesn't force you to raid investments, borrow at expensive rates or stop pension contributions.
Check your projected state pension. Use the online forecast service at GOV.UK to see how much you are on track to receive and when. Don't assume a full pension is automatic.
Check your National Insurance record. Identify gaps that could affect your entitlement and whether you can fill them through NI credits or voluntary contributions. Typically, 35 qualifying years are needed for the full new state pension.
Review your pension contributions, ISA savings, mortgage debt and retirement goals after major life changes and at least once a year.
What to do if nearing retirement
If retirement is looming, you need to make those final years count. There's still time to increase contributions, reduce spending commitments, pay down debts and make important decisions.
Plot your retirement income. Add up your expected state pension, workplace and personal pensions, ISAs, savings and other income, then compare the total with your likely spending needs. Remember to account for tax.
Confirm your state pension age. Get a forecast from GOV.UK and, if planning to retire earlier, work out how to fund the gap. Check your NI record and whether filling any gaps would increase your pension.
Load up that pension. If you can, increase contributions, make use of employer matching and investigate whether you can claim more tax relief. You can generally contribute up to 100% of your relevant UK earnings, subject to the £60,000 annual allowance and any restrictions that apply to you.
Clear those debts. Ideally, you'll be debt-free in retirement, so focus on expensive borrowing such as credit cards. Paying down your mortgage can make sense, but money paid into a workplace pension with matching employer contributions could work harder. You may be able to use tax-free pension cash to clear debts, but weigh up the cost of losing that money from your retirement fund. Check for early repayment charges.
Consider working on. Full-time work followed by full retirement isn't your only option, says Kate Smith, head of pensions at Aegon UK. “Think about whether you want to phase down, change role or keep working in some capacity.” A part-time job, consultancy work, renting out a room or turning a skill into a small business could supplement retirement income.
Plan tax-free pension cash. You can usually take up to 25% of your pension as tax-free cash, up to a maximum £268,275. Many people use it to clear debts, but don't take it simply because you can. Leaving money invested could help it grow and provide more income later.
Andrew King, retirement specialist at wealth manager Evelyn Partners, warns: “Pension withdrawals can be subject to big tax charges and could reduce your future standard of living in retirement.”
Understand your pension options. With a defined contribution pension, you may be able to take lump sums, draw an income through drawdown or buy an annuity. Each has different implications for income security, tax, investment risk and the risk of running out of money. Consider regulated advice or speak to the government-backed Pension Wise service.
Beware pension transfers. Final salary scheme members should think carefully before transferring out. You could lose valuable guarantees and benefits, and the decision is generally irreversible. Seek regulated advice.
Review your investment risk. Taking investment risk can help your pension grow, but your needs may change as retirement approaches. Consider how much money you will need soon and how much must last for decades. Don't abandon shares altogether simply because you retire.
Consider state pension deferral. You don't have to claim your state pension as soon as you become eligible. Deferring increases the eventual payment, which may help if you're still working and want to delay taxable income. But it can take around 17 years to recoup a year's worth of foregone pension. Consider your health, tax position and other income before deciding.
The more carefully you plan your income, debts, pension withdrawals and working arrangements, the less vulnerable you'll be to changes in state pension policy.
What to do if you are already retired
Once you've retired, you can't go back in time and build a bigger pension pot, but you can review your spending, benefits, investments and income to make sure your money lasts as long as you do.
Work out your retirement budget. Separate essential spending, such as food, energy, housing and bills, from discretionary spending, such as holidays and hobbies. Establish the minimum income you need and how much flexibility you have.
Check your tax position. State pensions, private pensions and other income can interact in ways that create unexpected tax bills. Review the full picture, especially if you have several income sources or take a large pension withdrawal.
Claim benefits and support. Check eligibility for Pension Credit, Council Tax Reduction and Housing Benefit where applicable, as well as help with energy costs and other support. Pension Credit can unlock additional assistance, potentially including help with heating costs, free NHS dental treatment and eye tests, a free TV licence for those aged 75 and over who qualify, and cheaper broadband and mobile deals. Check eligibility rules for each benefit.
Review pension withdrawals. If you have a drawdown pension, check how much you're taking out each year and whether it's sustainable, says Andrew Tully, technical services director at pension specialists Nucleus. “Taking too much during the early years of retirement can leave you short later.”
Strike the right balance. Shares offer higher potential returns, but carry more risk. Keep a cash reserve to draw on during a stock market downturn, and shop around for competitive savings rates, Tully says.
Consider an annuity. As interest rates have risen, so has demand for annuities. A 65-year-old with £100,000 can now get around £7,700 a year from a level annuity, depending on the terms available.
Kris Black, head of annuities at Canada Life, says: “With rates hitting decade highs, annuities are increasingly attractive for people seeking a reliable, predictable income for life that is not exposed to the ups and downs of investment markets.” You could split your pension between an annuity and drawdown.
Consider part-time work. Even a few hours a week could make a difference, reducing the amount you need to take from savings.
Review housing costs. If your home is large or expensive, downsizing could release capital and reduce bills, but moving can be costly and disruptive. An equity release lifetime mortgage can unlock money from your home, but may affect benefits and reduce inheritances. Seek advice before committing.
Plan for care costs. Think about how you would meet potential care expenses without exhausting money needed for everyday living.
Help family and protect yourself. If you want to give children or grandchildren money, or reduce inheritance tax bills, leave enough for your own living costs, emergencies and possible care needs. Don't give away assets assuming you can reclaim them if circumstances change.
Review your estate planning. Update your will, pension beneficiary nominations and any lasting power of attorney arrangements. Consider inheritance tax, but don't sacrifice your own financial security simply to reduce a future tax bill.
