The benefits of delaying your retirement
The government's decision to phase out a default working age could see thousands more workers delaying their retirement. But while putting the golf, or other new hobbies you'd plan to start on hold, may not initially appeal, it could have a very positive impact on your pension.
According to research from Fidelity International, delaying your retirement by just five years could significantly boost your income in retirement.
Do the maths
For example, a man retiring at age 65 with £100,000 can expect to buy a single-life annuity worth about £6,800 a year at today's rates. If he were able to put off buying his annuity for another five years, he might be able to grow his retirement fund to about £128,000 (assuming capital appreciation of 5% a year). This would allow him to buy an annuity worth around £10,000 a year at the higher rate applicable to a 70-year old man.
Tom Stevenson, investment director at Fidelity International, said: "The decision to scrap forced retirement at 65 means people now have more choices as they approach retirement. They can now work longer, giving themselves a few more years in which to allow their pot to grow and increasing the size of annuity they will be able to buy with their savings. With increasing longevity, this could be a sensible option for some.
"For those who aren't keen to work a day longer than they have to, the only option is to save more, or start saving earlier."
Stevenson added: "With people living longer, responsibility is increasingly being passed on to individuals, which means that achieving an enjoyable retirement will require a real commitment. There are no short-cuts to a comfortable retirement."
The more you save and the earlier you start, the better off you'll be in retirement.
For more on the retirement age annmouncement read: Retirement age scrapped: What does it mean for you?
Fidelity International says someone saving £130 a month will end up with a pension worth 30% more than someone saving £100 a month, all other things being equal. This in turn will buy an annuity worth 30% more on retirement.
Someone who plans to retire at the age of 65 and begins saving £100 a month at the age of 40 will end up with a retirement fund worth around £60,000 (based on a growth rate of 5% a year).
If, however, they start saving 30 years ahead of their planned retirement at the age of 35, those same £100 a month of savings and the same return of 5% a year will result in a pension pot worth £84,000 at 65 despite the fact that they will only have saved an additional £6,000.
If they start saving at the age of 30, the same assumptions will result in a pot worth £114,000 and if they can start at the age of 25 they will end up with £153,000.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.