The good news is that people are generally living longer. Britons aged 30 today have a 50% chance of living to more than 100, while 50 year-olds have an evens chance of reaching 95*.
Longer lifespans, however, raise financial challenges - for individuals as well as for families and society.
The idea of a retirement lasting many decades may seem appealing, but longer retirements mean more years of living off your pension and savings. Will yours be enough?
Unless you believe the government is likely to become more generous with the state pension and other retirement benefits, individuals will almost certainly need to save more to enjoy the standard of living they would like in retirement.
Employer pensions have become generally less generous. Few people starting a new job are offered a traditional defined benefit pension – where the employer guarantees you a certain level of pension based on your salary.
Most employer-based pensions now depend on how much you (and your employer) have contributed and the investment returns achieved by that money.
That said, for most people saving via a workplace pension remains a “no brainer” for building a retirement nest egg – not least because the employer contributions are effectively “free money”.
Importantly, pension savers benefit from a number of attractive tax breaks, including income tax relief on contributions and up to 25% of the proceeds being tax-free.
However, the government has been paring back the tax breaks on pensions in recent years.
Individuals on the highest incomes can only receive tax relief on up to £10,000 of pension contributions a year. Increasing numbers of people are also being caught by “lifetime allowance” limits on the total value of their pension funds.
The fear is that despite rising longevity, there will also be further reductions in pension tax breaks in future – for example, higher-rate tax relief on contributions could be scrapped. For individuals who are in the 40% or 45% income tax bands, it is worth considering taking advantage of higher-rate tax relief while they can.
It’s not just about pensions
Saving more into a pension shouldn’t be seen as the only way of funding a potentially long lifespan.
There are a range of other tax breaks available to savers. Most obviously, there are tax-free Individual Savings Accounts (ISAs), but also higher-risk investments including Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS).
Limits on pension tax breaks increase the attraction of ISAs and other tax-advantaged investments for retirement saving. With ISAs, for example, adults can now squirrel away £20,000 a year and earn tax-free returns on that money.
As well as saving more, for many people part of the solution to having a comfortable retirement could be working until they are older. This means you live off your salary for longer, can hopefully save some of these earnings for your retirement, and do not have to draw on your pension and savings until later.
Recent rule changes also mean that individuals have much more flexibility about how and when they draw an income from pensions. For many people, the increased flexibility will be welcome, but it also means a risk that individuals withdraw too much too quickly and so run out of money later in retirement.
Saving more, working longer, and having the right financial plan – this combination is likely to be much of the solution for the longer lifespans that many of us hope to enjoy.
*The 100 Year Life: Living and Working in an Age of Longevity, by Andrew Scott and Lynda Gratton
The value of investments and any income from them can fall and you may get back less than you invested.
Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.
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