The stealth tax set to torpedo your retirement

Hands off my pensionThis week, the government had been expected to announce the details of its plan to link future state pension age increases to longevity.

Announced in the March Budget, creating such a link would save the national coffers significant amounts of money. How significant? A whopping £3.5 billion a year in reduced pension payments for every year that the state pension age was increased, according to the Pension Policy Institute and the National Institute for Economic and Social Research.
But no proposals have appeared. Commentators with pre-prepared soundbites have been caught flatfooted. And last night, when I spoke to the Department for Work and Pensions, the duty press officer would speak only of a publication date "sometime in the autumn".

Extra taxes, fewer pensions
After the various U-turns triggered by the aftermath of the March Budget -- remember the pasty tax, anyone? -- it's not difficult to guess at what has happened.

In short, the figures probably need massaging, in order to avoid yet another high-profile row and subsequent U-turn.

For the numbers are frightening. Not just in terms of lost pension income, but also the taxes paid by individuals being forced to work longer.

And according to the National Institute for Economic and Social Research, total government savings -- taking account of reduced pension liabilities, and increased direct and indirect tax revenues -- would amount to £13 billion a year.

Wealth transfer
What does that mean to you -- and to me?

Tom McPhail, the ever-amiable head of pension research at Hargreaves Lansdown, has done the sums.

Assuming a retirement cohort of 700,000 individuals a year, he says, that equates to around £5,000 per person in lost pension income per person, and a total per person transfer of wealth to the government of £18,500.

That's right. For every year's increase in the state pension age, you and I will be £18,500 worse off, in terms of today's money.

What to do?
One thing is certain: there are no easy options. As Mr McPhail puts it:

"There are basically only two things you might want to do: work later, so you have continued income to cover the missing years of state pension, or make sure you have saved enough to be able to retire when you want, and use your savings until your state pension kicks in. The only other outcome is the one you want to avoid: ending up in your mid to late 60s with no earnings, no pension and not enough savings."

And when it comes to pension savings, as I've said before, I believe that directly harnessing the long-term wealth-building power of the stock market produces gains that will beat cash, property and high-charging personal pension plans.

Should you save inside a SIPP, or inside an ISA? It's up to you.

An ISA offers tax relief on income, and provides ready access to your money should you need it prior to retirement. There's no obligation, either, to buy an annuity.

A low-cost SIPP, on the other hand, offers tax relief on contributions, currently at your highest marginal rate -- which is especially attractive if you're a higher rate taxpayer now, but likely to be a basic rate taxpayer in retirement.

What to buy?
Either way, though, those looking for early retirement need to think about a lot more than just the choice of wrapper. Frankly, the choice of investments will be much more important.

A selection of funds, perhaps? Fine if you can stomach the charges, or don't feel up to managing things yourself. But the charges, let's face it, will soak up a fair-sized slug of your investment gains.

A low-cost index tracker, or ETF? Again, there are charges, although tracker providers HSBC and Vanguard are driving these down.

But beyond the associated wrapper charges, individual shares carry no charges -- which makes a diversified portfolio, held in a wrapper, probably the best bet that there is.

The return from cash over the same period? A mere £6,163. I know which outcome I prefer. Once again, the report is free, and can be in your inbox in seconds.

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