How to prepare for the 2028 pensions age rise

Plan­ning for retire­ment was a rel­a­tive­ly straight­for­ward affair when today’s pen­sion­ers were still in the work­place. But the rules have changed – and if you don’t keep up, you risk los­ing out. 

In the past, retire­ment would usu­al­ly start at state pen­sion age and like­ly last for a mat­ter of years, rather than decades. It would be fund­ed large­ly by final salary schemes and the state pen­sion.

Things have changed dra­mat­i­cal­ly in recent years. What does retire­ment mean today, and how can savers pre­pare accord­ing­ly?

How retirement is changing

Ris­ing life expectan­cy means today’s work­ers need to gen­er­ate suf­fi­cient pen­sion sav­ings for a retire­ment last­ing two or three decades or more. At the same time, respon­si­bil­i­ty for sav­ing for retire­ment has shift­ed emphat­i­cal­ly towards the indi­vid­ual. This process accel­er­at­ed with the so-called ‘pen­sion free­doms’ of 2015, which brought more flex­i­bil­i­ty and choice but also greater com­plex­i­ty. 

The most sig­nif­i­cant change in retire­ment pro­vi­sion in recent years is the decline of defined ben­e­fit (DB, or final salary) schemes, accord­ing to Fiona Tait, tech­ni­cal direc­tor at Intel­li­gent Pen­sions. DB schemes pro­vid­ed guar­an­teed pay­outs linked to salary. How­ev­er, most of today’s pen­sion scheme mem­bers are in defined con­tri­bu­tion (DC) schemes, where the out­come depends on invest­ment per­for­mance, charges and the amount paid in. 

“Cur­rent­ly around three-quar­ters of retire­ment income comes from pri­vate sec­tor defined ben­e­fits schemes, where­as near­ly two-thirds of ongo­ing con­tri­bu­tions are to DC schemes,” Tait points out. 

This means that while many cur­rent retirees are enti­tled to at least some pro­por­tion of a guar­an­teed income stream, it’s a dif­fer­ent sto­ry for the pen­sion­ers of tomor­row.

Moving the pension goalposts

Two changes tak­ing place in 2028 will fur­ther raise the stakes. First, the state pen­sion age for men and women, cur­rent­ly 66, will begin grad­u­al­ly increas­ing to 67 between 2026 and 2028. 

This won’t affect those with enough pen­sion sav­ings to be able to choose their retire­ment date. But it will have a much big­ger impact on peo­ple with more mod­est pen­sion pots, for whom the state pen­sion age remains high­ly rel­e­vant. The aver­age retire­ment age for men is 65.2, accord­ing to the Pen­sions Pol­i­cy Insti­tute, while the aver­age retire­ment age for women has increased from 60.6 in 1995 to 64.3 in 2020.

“The high­er state pen­sion age could lead to many of those cur­rent­ly in their 40s or 50s hav­ing to work for longer,” notes Anna Mur­dock, head of wealth plan­ning at wealth man­ag­er, JM Finn. “They may feel they have to con­tin­ue work­ing to main­tain their stan­dard of liv­ing until the state pen­sion kicks in.”

The nation­al min­i­mum pen­sion age (NMPA) will also increase in 2028, from 55 to 57. This is the point at which you can begin access­ing your pri­vate retire­ment sav­ings, so it affects those hop­ing to retire ear­ly or begin reduc­ing their work com­mit­ments. How­ev­er, very few peo­ple use the NMPA as a retire­ment tar­get, so this increase is like­ly to have con­sid­er­ably less impact than the change in the state pen­sion age.

The retirement savings gap

While the pen­sions back­drop con­tin­ues to change, one thing remains the same: too few peo­ple are ade­quate­ly pre­pared for retire­ment. 

A third of ‘Gen­er­a­tion Xers’ — those cur­rent­ly aged between around 42 and 57 – are at high risk of retir­ing with ‘min­i­mal’ incomes, accord­ing to the Inter­na­tion­al Longevi­ty Cen­tre UK.

A report by the Social Mar­ket Foun­da­tion warned in Feb­ru­ary that more than two-thirds of 50–64 year olds in the UK don’t know how much they’ll need for retire­ment. 

Those cur­rent­ly in their 40s and 50s are also mem­bers of the ‘sand­wich gen­er­a­tion’, often help­ing elder­ly par­ents with lat­er life care while also sup­port­ing adult chil­dren with ris­ing liv­ing costs. 

“For many, retire­ment is main­ly going to be dic­tat­ed by afford­abil­i­ty, and sav­ings rates are large­ly inad­e­quate to sup­port a com­fort­able retire­ment,” Tait warns. “Being able to retire ear­li­er than the state pen­sion age will often be unsup­port­able and they will have to wait until age 67, or lat­er.”

Peo­ple sav­ing for retire­ment now are more like­ly than pre­vi­ous gen­er­a­tions to have mul­ti­ple work­place pen­sions, pri­vate pen­sions and non-pen­sion sav­ings such as ISAs. While their pen­sion income will depend on vari­ables such as invest­ment returns, they also have more flex­i­bil­i­ty and choice in how and when they retire. But that flex­i­bil­i­ty demands a proac­tive approach.

Taking control

The lev­el of sav­ings need­ed for a com­fort­able retire­ment clear­ly varies between indi­vid­u­als. How­ev­er, the Pen­sions and Life­time Sav­ings Asso­ci­a­tion (PLSA) has pro­posed a set of Nation­al Retire­ment Income Tar­gets to give peo­ple an idea of how much to save. 

For exam­ple, an indi­vid­ual liv­ing in a sin­gle house­hold out­side Lon­don would require a pen­sion pot of £440,000 for a ‘mod­er­ate’ income in retire­ment and £966,000 to be ‘com­fort­able’. The PLSA believes an ongo­ing sav­ings rate of 12% is required to pro­vide a ‘mod­est’ retire­ment income. 

But although the pen­sions land­scape is often com­plex, there are some fair­ly sim­ple steps that savers can take to boost their retire­ment sav­ings.

Start ear­ly and save often. Once you get into the habit of reg­u­lar­ly sav­ing even mod­est amounts into a pen­sion and/or ISA, you can let com­pound­ing work its mag­ic. This is the snow­ball effect that occurs when the returns from your invest­ments are rein­vest­ed to gen­er­ate their own growth. “The best tip I can give is to start sav­ing as ear­ly as pos­si­ble and base your lifestyle around what is left, rather than try­ing to reduce what you are already spend­ing,” sug­gests Tait.

Sec­ond, use your work­place pen­sion. If you’re in your employer’s scheme, it like­ly match­es your con­tri­bu­tions or at least con­tributes a per­cent­age of the amount you pay in. You’ll also be get­ting tax relief on your con­tri­bu­tions at your mar­gin­al income tax rate. “To illus­trate the point, should you be a high­er rate tax­pay­er and wish to make a £10,000 con­tri­bu­tion to your pen­sion plan, it could cost you as lit­tle as £6,000 net and you will ben­e­fit from £4,000 tax relief,” Mur­dock explains. 

And max­imise your tax allowances. The best way to boost retire­ment funds is to ful­ly use all the tax allowances and exemp­tions avail­able to you, accord­ing to Tom Munro, own­er of Falkirk-based Tom Munro Finan­cial Solu­tions. “For exam­ple, max­imis­ing ISA con­tri­bu­tions each year will accu­mu­late tax-free over time, pro­vid­ing a tax-free income stream lat­er.”

Retire­ment is a long-term process and atti­tudes change rel­a­tive­ly slow­ly. 

“Most peo­ple in their 40s and 50s base their expec­ta­tions for retire­ment, if they think about it at all, on the expe­ri­ence of their par­ents, with­out real­is­ing how much longer they are like­ly to live or appre­ci­at­ing the impact of the DB to DC shift,” Tait points out.

Those able to build up sub­stan­tial pri­vate sav­ings will have the choice of when and how they wish to retire – but they are like­ly to be in the minor­i­ty.