43 or younger? Here’s how to recoup your years of lost pension income by investing
In October this year, the pension age is due to increase from 65 to 66 years old, with a further increase to 67 by 2028 and plans to increase this even further by 2046 to 68 years old.
Leading Peer to Peer investment platform, Sourced Capital, has looked at the lost pension income for those facing the additional three years at work, the current median age of those in line to work until they’re 68, how long they still have left in the workplace, and just what they would need to invest today via private pension funds vs peer to peer platforms, in order to recoup their lost pension income between now and the time they retire.
Not only are we set to work for longer, but we’re also in line for a pension pay cut to the tune of £8,767.20 for the first year for those working to 66, climbing to £20,588.71 for two additional years for those working until the age of 67, and an eye-watering £47,582.06 over three years for those working until the age of 68 when also accounting for the minimum pension increase of 2.5% per year*.
That means anyone born after 6th April 1978, at a current median age of 42.5 years old, faces being nearly £50k out of pocket from lost state pension income as a result of the Government moving the pension age goal posts.
However, there are moves you can make now to bridge this gap and increase your lost pension pot through investing wisely.
A Private Pension Fund
Over the last decade, private pension funds have averaged a return of 5.9% per annum.
Therefore investing £1,000 today based on this average while considering compound interest and a yearly compound interval, would return just £4,314 over a 25.5 year term. Nowhere near enough to bridge the pension gap.
Investing into the same scheme with £10,000 would return a more favourable return of £43,137, but it would take an investment of £14,370 today in order to make both your money back and the additional pension loss of £47,582 by the time you hit 68 (£61,987).
For those with deeper pockets, investing £50k would return a total of £215,684 over the same period, while £100k would bring a return of £431,367.
Peer 2 Peer Platforms
But, a more interesting investment option is a Peer to Peer platform such as Sourced Capital. While your capital is at risk, with annual returns of as much as 10%, you could bridge the pension pay gap with a much smaller initial investment today.
In fact, with a return of 10% per a year, it would take an investment of just £4,595 today to see a return of £52,215 over a 25.5 year period, enough to recoup your initial investment along with an additional £47,620 to cover your three years of lost pension income.
Founder and Managing Director of Sourced Capital, Stephen Moss, commented:
“The requirement to work for longer is one that won’t sit well for those that have paid into pension schemes for many of their working years, only to see as many as three years worth of pension payments vanish to the tune of almost fifty thousand pounds.
But there’s a silver lining and for those that stand to lose the most, there are other investment options available that could see them recoup this lost pension pot by investing less than five thousand pounds now with an eye on the future.
In fact, the right investment now could not only recover these lost in pension payments but could do so by the age of 65, allowing you to retire ‘early’ without any financial penalty.
As with all investments, there is an element of risk. However, opting for the right platform and understanding work pension compensation can help reduce this dramatically. For example, all of our investors get a first charge against the property invested in, which gives a greater level of protection and lowers risk but is something that not all platforms do.
We always recommend that investors only opt for FCA approved companies which again reduces risk, while we also only loan at a maximum loan to value of 70%. We also offer all investors the chance to view a project and to learn directly from us which again, is something that other platforms don’t offer, but for us, it provides greater transparency and trust while helping improve knowledge on a particular investment.”
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Pension shortfalls due to rising pension age
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Status
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Eligible pension age
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Pension amount shortfall (amount of £ worse off due to rising pension age)
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Accounting for pension inflation (min 2.5% pa)*
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Now
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65
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x
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x
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2020 (October)
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66
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-£8,767.20
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-£8,767.20
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2028
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67
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-£17,534.40
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-£20,588.71
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2046*
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68
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-£26,301.60
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-£47,582.06
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Investment examples to help make up pension shortfall due to age rise
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Status
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Eligible pension age
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Born in – period
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Approx age range now
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Median age of cohort
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Years of investment until pension age
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Now
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65
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1953-Sept 1954
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65
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x
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x
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2020 (October)
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66
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Oct 1954 to March 1961
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59-66
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62.5
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3.5
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2028
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67
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March 1961 to April 1977
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43-59
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51
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16
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2046*
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68
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April 1978 onwards
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42-43
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42.5
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25.5
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Private pension fund investment return thresholds at an average annual rate of 5.9%
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Investment Amount
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Term (Years)
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Return by eligible pension age of 68
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Return less investment
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£1,000
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25.5
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£4,314
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£3,314
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£14,370
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25.5
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£61,987
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£47,617
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£10,000
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25.5
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£43,137
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£33,137
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£50,000
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25.5
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£215,684
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£165,684
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||
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£100,000
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25.5
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£431,367
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£331,367
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Peer 2 Peer investment return thresholds at an annual rate of 10%
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Investment Amount
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Term (Years)
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Return by eligible pension age of 68
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Return less investment
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£1,000
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25.5
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£11,364
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£10,364
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£4,595
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25.5
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£52,215
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£47,620
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£10,000
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25.5
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£113,635
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£103,635
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£50,000
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25.5
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£568,177
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£518,177
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£100,000
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25.5
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£1,136,354
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£1,036,354
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Sources
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Pension payment calculator
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Pension age timetable
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Average pension fund growth
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Triple lock explained*
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Peer to Peer Platform
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