By: Jeannie Boyle, Director & Chartered Financial Planner- EQ Investors
Measure is part of a wider government agenda to prevent the proportion of people’s lives spent in retirement becoming unsustainably high.
Following a joint consultation, the government has confirmed plans to increase the minimum pension age from 55 to 57 in 2028. The change is intended to reflect longer life expectancy and the increase in the State Pension Age.
There are exceptions for those who have a protected pension age or who take their pension due to serious ill-health. Members of the police force, firefighters and the armed services will automatically have their current pension ages protected.
Whilst this was first announced in 2014, the government has only just released its response to the Treasury and HMRC consultation on implementing the change.
Loophole
The government intends to allow people to ‘lock in’ a retirement age of 55 provided they are a member of a scheme that has a retirement age of 55 written into its rules. To qualify, you need to be a member of such a scheme by the 5th April 2023. This could cause issues in the future if you want to transfer your pension from one plan to another – you may find that you have to wait until age 57 to access your benefits.
When the minimum pension age increased from 50 to 55 in 2010 many people rushed to draw their 25% tax-free cash from their pensions before the change took effect. If the money is used to pay off high interest debt, then taking the tax-free lump sum before you retire can make sense. For most people it’s better to leave the money inside their pension where it can grow free of tax and is outside your estate for inheritance tax.
Planning for the retirement you want
At age 55 a woman’s life expectancy is 87, but she has a 1 in 4 chance of living to 94 and a 1 in 10 chance of living to 98. For a man those figures are 84, 92 & 97. Your pension may well need to sustain you for over 40 years. Taking money out before you really need to puts far more pressure on the funds remaining.
Since the introduction of pension freedoms in 2015 around £45billion has been withdrawn from pensions. Some people are likely to find that they don’t have enough left to fund the retirement they expected.
Leaving your pension fund to accumulate will make a difference to the amount of tax-free cash you can withdraw.
At age 55, with £500,000 in a pension, you could draw £125,000 from your pension fund as a tax-free lump sum. If the remaining fund grew at 5% a year until you actually retire at 65, you’d have roughly £610,000 left to provide retirement income.
If you waited until age 65 to draw the tax-free cash, you’d be able to draw c£203,000 as a tax-free cash, an extra £78,000.
