Business

Do you always look on the bright side of life?

For those who are solely dependent on the state pension, the current amount of £8,767 a year is only enough to carry an average recipient for eight months
For those who are solely dependent on the state pension, the current amount of £8,767 a year is only enough to carry an average recipient for eight months For those who are solely dependent on the state pension, the current amount of £8,767 a year is only enough to carry an average recipient for eight months

THERE'S been much talk in the last week about new findings showing a clear connection between being optimistic and living longer. Boston University School of Medicine, for instance, said that looking on the bright side gives you a much better chance of living to 85.

Research based on a large group of women, divided up by their outlook on life, found that the most optimistic tended to live 15 per cent longer than the rest. For a male group, the sunniest dispositions lived around 11 per cent longer.

Well, I’m afraid I have to give a warning: optimism is a great thing, but only when tinged with the realism of good advice and good information.

There have been many reports over the past few years showing that we tend to have an over-optimistic impression of how much money we’re going to have in retirement.

When we’re not informed, and we’re not talking to someone who is, we are in danger of finding that things do not work out as planned. This is particularly important when thinking about our retirement.

So here’s another important event that happened in the last week. Last Wednesday was Pensions Shortfall Day for single pensioners, and we were given a stark reminder that people have an over-optimistic notion of how much they will have to live on later in life, starting with their state pension.

Financial services company Just Group told us that a single pensioner spending just the average amount to live would have used up the year’s state pension allocation by August 28, leaving four months to go and leaving themselves £4,500 short if they have no second pension or other source of income (figures show the full state pension for an adult is £8,767 a year, compared to the average annual spending for a one-person retired household of £13,265).

A pensioner couple lasted a whole three days longer, as their money didn’t run dry until last Saturday. Without exceptional spending, just food and the normal day-to-day outgoings, they would need another £8,700 between them to keep their heads above water throughout the autumn and until December 31. The combined state pension income for a couple is £17,534, but their annual outgoings are far higher at £26,244.

These are only today’s figures. And as we constantly stress in this column, we don’t have a crystal ball to see what the state pension or the cost of living is going to be when we come to retire.

What is certain is that the state pension scheme, and pensions in general, are the ongoing target of tinkering by successive governments. They are attempting to rein in costs and curb the massive burden that the state pension is for a hard-pressed Chancellor of the Exchequer struggling to balance the nation’s books.

Even if the amounts do rise in step with inflation, the second approach to controlling the cost of the state pension is to make us wait longer, before we can draw it.

Recently we mentioned that while state pension age used to be 60 for women and 65 for men, this year it’s 65 years and three months for both women and men, and it rises to 66 for both men and women in October 2020. It will then rise to 67 between 2026 and 2028 and to 68 between 2044 and 2046.

Indeed a child born this year could well be 70, before they can draw their state pension.

Now, many of us will have two strings to our bow: a workplace pension alongside our state pension, particularly since auto-enrolment was begun in October 2012, ensuring that all employees aged over 22 and earning at least £10,000 a year are automatically entered into their workplace pension scheme.

But a violin with only two strings sounds awful. Much better to have one with three. There is the option to set up a personal pension for yourself, or even a Stakeholder Pension for your child, to provide an extra strand of income in later life.

Remember, you could be looking at funding a retirement of 20 years or more – particularly if you’re an optimist!

:: Michael Kennedy and Shaun Doherty are independent financial advisers and pensions specialists, and can be contacted on 028 71886005. Further information on Facebook at “Kennedy Independent Financial Advice Ltd” or via www.mkennedyfinancial.com