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State pension clarity now but who knows what later

O'NeillM

State pension clarity now but who knows what later

Investors have been crying out for simplicity and clarity in the state pension system and now they're going to get it. A new flat-rate state pension of around £140 a week will replace our two-tier state pension and the means-tested top-up pension credit system.

But the new pension comes at a cost: there will be higher retirement ages for future generations and many people will lose out from the proposed abolition of higher state second pension payments. Plus, people already in retirement won't get it, many having to make do with inferior benefits (the full basic state pension is currently £102.15 a week).

The central idea behind state pension reforms is that if people have a clear idea of what they will get from the state, they can decide what they need to save on top. While a flat-rate state pension does make it easier to plan for retirement, meaning small amounts of savings won't exclude you from means-tested benefits, for the well-off not much has changed in financial planning.

You still need to view the state pension as a bonus and factor it into your plans as such. Hopefully, it will be a substantial bonus, but future governments could tinker with it more. John Ball, head of UK Pensions at Towers Watson, said: "The theory is fine but in practice we know that every generation of politicians likes to leave its fingerprints on the state pension system. Today's twentysomethings can't be too sure that a £140-a-week payment will be around when they retire, especially if there are questions about affordability."

Make sure that you are putting enough aside privately to make sure that you're going to have enough to live on. According to the Joseph Rowntree Foundation, a single working age person in the UK needs to earn at least £14,400 a year before tax, to afford a basic but acceptable standard of living, while a mortgage-free pensioner couple needs £11,544 a year. Based on a 4 per cent income rate, you'll need a retirement pot of £360,000 as a single person or a joint retirement pot of £288,600 to achieve the lower figure.

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