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Why the new State Pension could derail your retirement plans

For most people, being able to quit the rat race and retire comfortably is the dream. Part of this goal is the receipt of the State Pension, a weekly payment everyone is entitled to as long as they have a record of National Insurance contributions. 

However, over the next few years, the government is bringing in some significant changes to the way the pension system operates. These changes could derail your retirement plans if you don’t prepare — and it is never too late to start. 

A flat level of income

Under the new State Pension, its pensioners are entitled to a flat rate of £8,500 a year. You will only receive this rate if you have a full contribution record. Generally speaking, you need at least 10 years of National Insurance contributions to be able to qualify for the entire amount.

The new system has been designed to simplify the pension process and improve affordability. It is being gradually rolled out with each new retiree moving on to the new system. Around 400,000 pensioners are receiving the new flat rate at present. 

This isn’t the only change the government is bringing in before the end of the decade. In November, the pension age will rise to 65 for women, up from 64 currently. By 2020, the pension age will increase to 66, and by 2028 it will move up to 67.

According to figures from Hargreaves Lansdown, based on current life expectancy trends, by the mid-2030s the pensionable age could be as high as 70, meaning people in their 30s today might have to work an extra five years before collecting the State Pension.

However, I believe the above is an optimistic forecast. According to the Office for National Statistics, by 2046, there are expected to be 18.7m people over the age of 65 in the UK, up from just under 12m in 2016. Some 24.7% of the UK’s population is expected to be over 65 by 2046, up from 18% in 2016. Meanwhile, the percentage of the UK population between 16 and 64 is anticipated to fall from 63% to 58%. 

So, not only will there be more pensioners around, but there will be fewer people paying taxes. With this being the case, I wouldn’t rule out further increases in the pension age in the years ahead to further relieve pressure on government finances. 

A sudden shock 

All of these changes mean you could be in for a sudden shock when it comes to retirement. 

According to consumer magazine Which, the average retiree needs around £26,000 a year to live comfortably, £13,500 more than the new state pension. These figures show that if you want a comfortable time, you’ll need to put aside money yourself (my colleague Royston Wild has more on how much is required to retire here). It is not enough to rely on the State Pension. 

How much is enough? According to Which, a pot of at least £210,000 is required to retire comfortably with the state provision as a top-up. To hit this level, I calculate you will need to put away £250 a month for 30 years at an interest rate of 5%. 

Overall, government changes coming in over the next few years mean that workers will have to retire later, with a lower income. However, if you prepare ahead, and build your savings alongside the State Pension, you can avoid a sudden shock at retirement. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.