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Real message of the pension age debate

The transition to a state pension age of 65 for women to equal that of men will not be complete until 2020. Yet we are already debating a further rise in state pension age for both sexes.

The Institute for Public Policy Research proposed 67 in June. In September, the Pensions Policy Institute published a detailed research paper about a possible increase in state pension age to 70 for people who are under age 40 today.

Then in October, the National Association of Pension Funds threw its weight behind a rise in state pension age to 70.

To many people, the thought of having to work to 65 is bad enough, so why all the talk about 67 or 70? It is not because the UK can not afford the current state pension structure with a starting age of 65 – it can.

Even allowing for increased longevity, the projected cost is almost flat as a percentage of gross domestic product – and much more modest than the cost of the state pension in most other European countries.

The real reason why we are talking about a rise in state pension age is to increase the level of pension which can be paid as of right, as opposed to means-testing. It is not a coincidence that this debate is happening at a time when the level of employer-sponsored pension provision is falling rapidly and the state is hugely increasing the scope of means-testing in old age.

But state pension age is only one piece in the retirement age jigsaw. One of the major changes in retirement patterns over the last 20 years has been a dramatic rise in the number of men who do not work to age 65.

For some such men this is a happy by-product of the golden age of pension provision, when employers used final-salary scheme surpluses to ease older workers into a comfortable retirement.

For other men it is plain redundancy, with no realistic prospect of ever getting another meaningful job – and a means-tested future. So one of the challenges for the Government is to create an economy where there are jobs for the over-50s who need them.

Another piece in the jigsaw is flexible retirement. The Government has already signalled its intention to “abolish the cliff edge of retirement” – not before time. It is ridiculous that someone can retire from Sainsbury&#39s on Friday and start a part-time job with Tesco on Monday but is not allowed to do the same part-time job at Sainsbury&#39s.

But in my view the real message for individuals is not about retirement conditions set by politicians and employers – it is about personal choice.

At what age would I like to retire? What standard of living would I then like to enjoy for the rest of my life? What income am I already on track for if I retire at my selected age? And the punchline question – what does that mean I need to be putting away between now and then? This is prime territory for individual financial advice.

Of these four questions, the first two are the choice of the individual. The third question, to establish the likely retirement income, is currently a major chore for financial advisers, but within a few years may be greatly eased by the appearance of composite benefit statements, as proposed in the July Spending Review White Paper.

The fourth question, to establish a savings strategy to achieve the desired outcome, may produce an unaffordable answer. If so, the individual needs to think again, raising the target age or reducing the target income, until the answer to the fourth question becomes realistic.

A fifth and final question is the choice of the savings vehicle. It does not have to be something with pension in its name and there is much talk about Isas and buy-to-lets.

Every vehicle has its risks but never forget that a pension plan is the only vehicle which is explicitly designed to provide a retirement income for life.

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