Pensioners are projected to make up a quarter of the adult population within the next 50 years because of improvements in life expectancy, according to an official review. The number of people of State Pension Age is expected to rise by 55 per cent to 19.5 million by 2075.
The number of those aged over 85 is on course to increase from 1.8 million to 5.1 million in the same time frame.
The state pension age is 66 and is due to rise to 67 between next year and 2028, then to 68 by 2046.
A new Pension Review will look at whether the state pension age should be linked to life expectancy to ensure there is fairness between generations, and whether the State Pension is sustainable, also comparing the UK with other nations.
The Government is not expected to increase the state pension age, regardless of the recommendations in the independent report. A government source said that doing so would be “electoral suicide”.
In 2005 the previous commission recommended automatically enrolling people into workplace pensions, which has caused the number of eligible employees saving to rise from 55 per cent in 2012 to 88 per cent.
This is all worrying news but also highlights an opportunity for parents and particularly grandparents to start saving in to pensions at a very early age for the children and grandchildren.
The amount that can be saved for children is capped at £3,600 per annum – although this nets down to £2,880 – or £240 per month – after Basic Rate Tax relief.
Statistics show that earliest pension contributions have the greatest effect – because of the extra time that money has to grow. Compounding is the eighth wonder of the world – allegedly according to Einstein.
For instance, if you made just one net contribution of £2,880 into a pension when your child was born, assuming it made returns of 5% a year after charges, your child would have £58,000 in their pension pot at the age of 57.
While that’s not going to be enough to retire on, and money will be worth less in future due to inflation, it’s not bad for an initial £2,880 investment.
However, let’s now assume you keep up the contributions and save £2,880 for your child every year from birth to age 18 and then leave it to grow with no further contributions. In this scenario you’d have a pot worth £713,000 when the child reached 57, assuming that same 5% investment growth each year.
More importantly, for grandparents, this money would have been taken out of their Estate for Inheritance Tax purposes – effectively giving a double tax benefit.
The retirement situation is definitely coming to the fore over the next decades as longevity and declining birth rates create the perfect storm for pensioners. Relying on the State is going to be a bigger and bigger risk as time goes by, as it becomes ever more unaffordable for many Governments throughout the world. This is nothing political, but simply a reflection of the economics of an aging population.
If you would like to explore the options for your children or grandchildren’s pension planning, then we would love to hear from you.
