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LOUISE FAIRSAVE: Considering retirement

BEA DOTTIN, [email protected]

LOUISE FAIRSAVE: Considering retirement

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Let us start considering retirement. Let us start with the age of retirement, moving to types of pensions, then to ways of accumulating a pension and onto finances during retirement – mainly the financial aspects.
This article starts by considering the age of retirement.
One stark reality of the 2001-2002 pension reform is that you will have to work longer if you intend to be eligible for the maximum National Insurance Scheme pension available to you. This may be a dismaying prospect for the older members of the workforce, particularly those who were looking forward to their retirement at age 65 or before.
Yet the question is: “Who would wish to be in regular employment at age 67?” And, even further: “Which employer will employ you until age 67?  Will there be any obligation on the employer’s part to keep you employed after you reach 65 years old?”
It is becoming more and more apparent that one needs to earn one’s own retirement, especially if one wishes to retire earlier than the newly set retirement age and yet to retire reasonably comfortable.
The initial steps to pension reform involved a three-prong approach – one part involved increasing the standard National Insurance retirement age from 65 to 67 over a 16-year period and another part involved increasing the contribution rate gradually over the years. The third prong involved increasing the limit of insurable earnings.
The standard retirement age has been increasing by six months at the end of every four-year period, with the first four-year period finishing at the end of 2005. So those workers who reached the original standard retirement age of 65 years at or before the end of 2005 were able to retire at that stage with no reduction in their National Insurance Scheme pension benefits.
All retirees who crossed that 2005 threshold would have had an adjustment to their standard retirement age.
Pension reform offered some flexibility in the retirement age by permitting retirement between the age of 60 and 70. People who opt for retirement prior to their revised standard retirement age earn a reduced pension, while those who elect to retire later will get an increased pension.
From 2003, early retirement was allowed at age 64. This age has been reduced gradually based on the experience of requests for early retirement and the need to protect the scheme’s feasibility. Currently, it should be about 62 years old. On the other hand, those who elect to continue to work past their revised retirement age will likely be required to continue contributing to the scheme.
Note that the reduction penalty for early retirement is significant: your National Insurance Scheme pension will be reduced by half of one per cent for every month you retire earlier than set. So if you retire a year early, your pension would be reduced by 12 months times half per cent or six per cent. For retiring two years early, the reduction would be 12 per cent and so on.
Just remember the days when people could contemplate retiring at 45 or 50 years old. Those retirement ages would represent reduction penalties upwards of 60 per cent each. Nowadays, such plans would require significant self-help in accumulating a pension fund.
The overall implication of all this is that if you plan to retire early by these new standards, you need to look out for your own retirement. As you earn, from as early as possible, some of your earnings should be allocated to earning the retirement you desire.
• Louise Fairsave is a personal financial management advisor, providing practical counsel on money and estate matters. Her advice is general in nature; readers should seek personal counsel about their specific circumstances.

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