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How I’d avoid a rising State Pension age

Last week the Centre for Social Justice put out a report suggesting that the State Pension age should rise to 70 by 2028 and 75 by 2030.

The idea is that, by increasing the State Pension age, more people will have to work for longer, which would boost the economy.

This report has attracted a considerable amount of criticism, and so far, there’s been no further comment from the government on its findings.

However, the age at which you can get your hands on the State Pension has already been slowly rising over the past few years.

Rising age

Currently, the State Pension age is set to increase to 67 for men and women by 2028, and to 68 between 2044 and 2046. There are plans in the pipeline for it to rise even faster, hitting 68 between 2037 and 2039. 

While this may not be palatable to some people, the fact of the matter is we are living longer, which means more and more people are eligible for the State Pension for longer. Sooner or later, something will have to give, and it is highly likely the age at which you are entitled to receive a State Pension will have to increase.

With this being the case, I have started to prepare my finances for a rising State Pension age, and I think you should do the same.

A private alternative

The best method, in my opinion, is to set up your own private pension. The good news is that over the past few decades, the government has introduced a range of tax-efficient products to help you do just that and make it easy for you to save for retirement. 

By far the best product to use is the SIPP. As well as the fact that any profits or losses on investments made in a SIPP wrapper are tax-free, investors also receive tax benefits for contributing. Any money you provide will be topped up by 20% by the taxman and any higher or additional rate taxpayers can claim back a further 20% or 25% respectively.

Investing your money is the best way to make sure that you have plenty of funds available when you decide to retire.

The best investments for your portfolio will depend on when you want to retire. If you have at least 10 years to go, then equities are the best option. 

For example, a low-cost FTSE 100 tracker fund could give you an average annual return of 8%, based on the index’s performance over the past decade. Other investments offer higher levels of return if you are willing to take on more risk.

Risk vs reward

Small-caps, for example, could give returns of 12% per annum, although they are more volatile and may not be suitable for every investor.

However, if you do think you can stomach the volatility of small-caps, they could help transform your finances. I calculate over 20 years, assuming an average annual rate of return of 12%, a deposit of just £500 a month would yield a total pension pot of £499,573. 

If you include tax relief on this £500 monthly contribution, the total gain could be closer to £600,000. This substantial pension pot would help you avoid the rising State Pension age entirely.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.