Plan now for pension age changes later
As the minimum age when you can access a pension pot rises, be very careful what you do with your fund
QI turn 50 in a few years’ time, and plan to wind down with working. But I noticed that the government has increased the minimum pension age to 57. What does that mean for me? Can I access my pension early?
AYou’re right – the Economic Secretary to the Treasury, John Glen, confirmed a long- standing plan to increase the age at which you can access your pension, from the current age of 55 to 57. The change will come into effect in 2028.
Mr Glen, t he member of Parliament for Salisbury, said that this change was “reflecting trends in longevity and encouraging individuals to remain in work, while also helping to ensure pension savings provide for later life”.
He also stated that people have known about this since 2014, giving plenty of time for people to plan for the future, and that legislation would be put in place in “due course”.
What the implementation of this new rule could look like remains to be seen – we don’t know when the changes will kick in, or whether or not they will be phased in gradually. It will all depend on the legislation.
This is not much help to you as you consider when you can start accessing your pension savings.
Steve Cameron at pensions company Aegon told Which? that the government could choose the start of the tax year in 2028, which would be 6 April. This would mean that anyone who has their 48th birthday before the 6
April 2021 will still be able to access their pension at the age 55, but anyone younger will have to wait a couple of extra years.
Adding to the confusion, the state pension age is also due to be increased in October 2028, from 66 to 67. The government could peg the increase in private pension access age to the state pension age rise.
Aegon thinks there could be further permutations. For example, the government could choose to phase in the increase gradually, much like the increase in state pension age, so that the age you access your pension will depend on your exact date of birth, and the generation of 50- somethings affected by this change will be able to draw their sav
ings at different ages. How you can access your savings at the age of 57 won’t be changing – unless, of course, the government decides to change the rules over the next eight years.
When you reach 57, you’ll be able to take a tax- free lump sum of up to 25 per cent, leaving the rest invested to draw on or to buy an annuity. Or you can take out ad- hoc lump sums, with the first 25 per cent tax- free and the remainder subject to income tax. Or you could cash in your entire pension in one go, again with the first 25 per cent taxed and the remainder subject
to income tax. It should be noted that this kind of flexible access only applies to defined contribution pensions – the type that sees you save into a big pot that accumulates throughout your working life. Defined benefit pensions, which see you being paid a guaranteed “salary” in retirement based on your earnings cannot be accessed in this way.
You could transfer your defined benefit pension into a defined contribution scheme to take advantage but this is a huge decision to make – you’ll need to take professional financial advice and should consider that it is generally not a wise decision to do so.
My final point is that you should be incredibly wary of pension scams, particularly around early access to your savings. Some firms will offer you access before the minimum age – often these are scams, or come with such high fees and taxes that you could see more than 80 per cent of your savings disappear. Find out more about these scams at the Financial Conduct Authority’s website fca. org. uk/ scamsmart/ typesof- pension- scam.