Is it harder to fund retirement than it used to be?

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

That seems a world away from the comparable limit today of £60,000 - even if that has risen from £40,000 two years ago.

In terms of the Lifetime Allowance, the chart below shows a more gradual reduction since 2010-11, when it peaked at £1.8m, but then the complete removal of the Lifetime Allowance after 2023/24 (it had been effectively decommissioned a year earlier when penalties for breaching it were removed).² The continuation of a limit on tax-free cash, however, means that a significant reduction in tax benefits does still occur after pension assets reach £1,073,100.

Taken together, today’s system is arguably less generous than it used to be - but only for those very wealthy people who could take advantages of the much higher Annual and Lifetime Allowances of the past. Reductions in these limits - and particularly the introduction of the Tapered Annual Allowance in 2016 - have made retirement saving harder for the highest earners.

What are your options at retirement?

A significant change in the options for those at retirement happened in 2015 when ‘Pension Freedoms’ were introduced. These meant that it was possible to access pension savings from age 55 and to use your money in a number of different ways, with 25% of it continuing to be available tax-free.

Money could be used to buy an annuity, the product that takes savings and pays a guaranteed income in return, or it could be left invested and accessed flexibly. This could be via drawdown, where income is paid regularly and taxed as income, or via lump sums where 25% of each withdrawal is tax free and the rest taxed as income. Or you could use a combination of all these options.

That is in contrast to the world pre-Pensions Freedom, when most people were required to use their money to buy an annuity. Back then, the system was criticised for being uncompetitive because many people ended up moving to an annuity offered by their existing pension scheme provider without much consideration for the better rates of income they might achieve elsewhere.

Today’s system offers more choice and, for many, better outcomes overall. Fears that pensioners could use the freedoms to raid their pots and blow them on the Lamborghinis, or anything else, have proved mostly unfounded.

The potential downside with today’s regime is that individuals may be required to engage more with their retirement income options to get the best out of the system. The passing of time has also seen the fading out of some valuable benefits that were offered on older pension schemes, such as a guaranteed annuity rates on retirement.

When can you get your money?

The Minimum Pension Age is the age at which you can normally access your pension. It was set at 55 in in 2010 and will rise to age 57 in 2028.

There can be some circumstances in which pension money can be accessed earlier than that. People in certain professions with traditionally low retirement ages (such as sports people) who had the right to take pension benefits before age 50 before April 2006 can keep that right if they have a ‘protected pension age’.

What encouragement is there to save?

While many limits and thresholds in the pension system have changed, the central principle that eligible contributions benefit from tax relief has remained intact. Read more about how that works here.

The big difference in today’s system versus the past is the principle of ‘auto-enrolment’, introduced in 2012. This is the idea that qualifying employees will automatically be entered into a workplace scheme, with contributions from them and their employer. Auto-enrolment contributions are set at 8% currently - 5% from the individual and 3% from their employer.

These rates may not be sufficient to provide adequate pension income in retirement on their own but they have formed a valuable starting point for pension saving for millions of workers since 2012.

What about the State Pension?

There is one way in which the State Pension is significantly less generous than in the past - you have to wait longer to get it.

From the 1940s until April 2010 the State Pension age was set at 60 for women and 65 for men. Between 2010 and 2018 the state pension age for women rose from 60 to 65, to equalise it with that for men, and then between 2018 and 2020 it then rose from age 65 to 66 for both men and women. Between 2026 and 2028 it is due to rise to 67. It is expected that from 2044 it will rise again to 68.

The amounts you’ll get also changed significantly in 2016 when a ‘New State Pension’ replaced the old system, which comprised the ‘Basic State Pension’ and various possible top-ups, known collectively as ‘Additional State Pension’.

The New State Pension is set at £221.20 per week in 2024-25 but you may get more or less, depending on your National Insurance (NI) record. You need 35 qualifying years of NI contributions to get the full amount.

That compares to the Basic State Pension of £169.50 a week for 2024/25. However, any Additional State Pension due is added to this. What people receive in Additional State Pension depends on the contributions made under old systems but the maximum top-up is currently £218.39 a week.

Direct comparison between the two systems is very hard but, in introducing the New State pension, the government asserted that most will end up getting more under the new system.

And note - while both the New State Pension and Basic State Pension are raised in line with the triple lock - the promise to raise payments by the highest of wages, inflation or 2.5% - the Additional State Pension rises only by inflation.

What about retirement savings beyond pensions?

An important extra tool in retirement savings has emerged over the past decade or so - ISA savings. ISAs - where contributions are made after tax and gains and income generated are tax-free - are nothing new, but the allowance for annual ISA contributions has risen considerably over the years.

From their introduction in 1999, when just £7,000 a year could be paid into ISAs, the allowance has grown in stages to reach £20,000 in 2017/18. It remains at that level.

It is now possible that individuals can hold very significant sums inside ISAs by the time they reach retirement, at which point they will be able to use ISAs to generate tax-free income. That means they may be able to reduce the sums they need from pensions - where income is potentially liable for income tax - and can plan their income more tax-efficiently.

So - were things really better in the past?

Today’s retirement regime is more flexible that in the past, with greater scope for individuals to tailor their retirement income options to suit them. For most people, the sums it allows to be contributed are ample - only the very highest earners have been severely limited in what they can pay in.

You may have to wait longer - to access your savings and to get the State Pension - but the system for both works better for most people.

What’s important, however, is that individuals engage with their saving and income options to make the most of the system as it stands.

The government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

Source:

¹ 2011 -2024 Pension scheme rates
² 2006 - 2011 Rates and Allowances - Pension Schemes