In 1983 15% of the UK population was aged 65 or over. By 2008 that percentage had risen to 16%, nothing drastic. But in the next 25 years, by 2033, those aged 65 or over in the UK are estimated to make up 23% of the population, which represents a dramatic change. This places an enormous burden on the government to fund your retirement through the basic state pension scheme.
The problem is that the basic state pension is only one of a number of funding issues facing the government both in the short and the long term. Although the recession in 2009 placed significant strain on the state budget, the issue related to pensions has been around for many years.
The issue for the government is that the state pension was never intended to support people for 20 or 30 years through retirement. Instead it was a means through which old age poverty could be eradicated.
When the basic state pension was introduced in 1908 it was payable to those aged 70 or over. This was at a time when life expectancy was actually below age 70. In contrast life expectancy now is around 80 years of age and is set against a retirement age of 65 for men and 60-65 for women.
So over the last 100 years the factors affecting the cost of funding the state pension have changed significantly.
Arguably the biggest factor to ever affect the cost to the government of the basic state pension however is yet to come. When the baby-boomers retire in approximately 15 years time the government will face an unprecedented strain on its resources. It is for this reason that more and more dramatic changes are being made to government policy that all point towards reduced funding and a higher retirement age.
This comes at a time when most people require increased funding and an earlier retirement age. That is because social and cultural developments in the UK have led more people to aspire towards a more active and prosperous lifestyle in their later years.
In order to afford this, and to ensure you are not working into your 70's or living off a minimal income there will need to be a certain amount of private provision and the costs involved should not be underestimated.
In a report undertaken by the Centre for Economics and Business Retirement (CEBR) in 2008, it was estimated that the average pensioner would spend £326,700 to fund retirement from the age of 65 to 85. If you live to 100 then you would need £708,500. This is a big lump sum to find from somewhere.
If you prefer to buy an income for life rather than live off a lump sum then a top annuity payable for life, based on a minimum payment period of 5 years and the income increasing in line with inflation, would pay £4,376 per annum for every £100,000 you invest. So if you wanted to live off £21,880 per annum, which is approaching the average wage, you would need a lump sum of £500,000 when you retire.
So should you start saving for retirement? Yes. The sooner you begin saving towards retirement the sooner you can plan to achieve your goals of an early and enjoyable retirement.
There is much to consider before you start saving for retirement. A pension might not be the best way for you to save. Many people prefer to put their money in an ISA or even property, believing these options may suit them best. Compare a Pension with an ISA, and property to make a more informed decision about what would suit you best.
