Workers May Need to Take a Risk to Fill Future Pension Hole

Millennials in the UK working have been told they need to consider alternative investments to ensure they don’t lose out to an ever increasing state pension age.

In October this year, the state 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.

Peer to Peer investment platform, Sourced Capital, has looked at the lost pension income for those currently aged 43, who are 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.

It said: “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.”

The figures mean anyone born after 6 April 1978, at a current median age of 42.5 years old, faces being nearly £50,000 out of pocket from lost state pension income as a result of the Government moving the pension age goal posts.

However, the firm said there are steps that can be taken now to bridge this gap and increase your lost pension pot.

Sourced Capital explained 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.

But, it added 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,” said a spokesman. “With a return of 10% per a year, it would take an investment of £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.”