When will age you can access pension cash rise from 55 to 57?

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Pension freedom: People in their 40s who will be affected by the age limit rise to 57 must plan ahead if they want to retire earlier, or need cash for other purposes
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Pension freedoms have given savers full access to their retirement savings from age 55 – but many people aged in their 40s now will have to wait an extra two years.

On the Government’s current timetable, the age when you can start tapping your private savings will rise to 57 in 2028, though it has not legislated for this yet.

That means anyone aged 47 or under must plan ahead if they want to retire earlier, or need cash for other purposes like paying off mortgages, home renovations or university fees for their children.

We look at ways to bridge the savings gap if you decide to retire at 55 anyway, or whether you should simply accept that you need to work longer and focus on building up your pension instead.

Pension freedom: People in their 40s who will be affected by the age limit rise to 57 must plan ahead if they want to retire earlier, or need cash for other purposes 

When is the age to access pensions rising to 57 – and will it actually happen?

Under current Government policy, it will increase the minimum age at which people can tap their private pension from 55 to 57 in 2028. 

That keeps it in line with the state pension age, which is scheduled to rise to 67 in that year.

But it implies a ‘cliff edge’ change to 57 in that year – albeit one people can see from a long way off – though there is no legislation to say this has to happen, explains former Pensions Minister Steve Webb.

He says the change could be brought forward, but it would be a shock if the age limit was moved overnight and applied immediately without any warning, because the Government has to give people time to plan ahead.

What is pension freedom? 

Pension freedom reforms have given over-55s greater power over how they spend, save or invest their retirement pots.

Key changes from April 2015 included removing the need to buy an annuity to provide income until you die, giving access to invest-and-drawdown schemes previously restricted to wealthier savers, and the axing of a 55 per cent ‘death tax’ on pension pots left invested.

The changes apply to people with ‘defined contribution’ or ‘money purchase’ pension schemes, which take contributions from both employer and employee and invest them to provide a pot of money at retirement.

They don’t apply to those with more generous gold-plated final salary or ‘defined benefit’ pensions which provide a guaranteed income after retirement.

However, those still saving into such schemes can transfer to DC schemes, provided they get financial advice if their pot is worth £30,000-plus. 

There has been an outcry over the decision to speed up two changes to women’s state pension age, and time them in quick succession – especially as many say they were sent no formal notification of the changes. 

Webb, now a partner at pension consultant LCP, says in a recent column for This is Money: ‘A future Government could decide to leave things at 55, in the knowledge that this would be popular and would also generate more tax revenue.

‘But it would be unwise to plan on the assumption that this would be the case.’

Ian Browne, pension expert at Quilter, says: ‘It has always been the government’s intention to raise the age at which savers can access their private pensions, and to do so in line with state pension age increases.

‘The logic behind this is that if the window between the two were to widen it would create a greater risk that people draw down their private pensions too quickly.’

Browne says that raising the age threshold for taking both private and state pensions is also based on the assumption that average life expectancy will continue to rise, but as it has slowed in recent years some people may begin to question that.

He adds that there is also a possibility the Government may decide that individuals should continue to have the freedom to use their private savings as early as age 55. 

Alternatively, it could phase in the change to 57 rather than suddenly switch it in April 2020 – or even put it back further.

‘If there is a “cliff edge” shift that would almost certainly leave some people frustrated if they turn 55 shortly after the cut-off point.

‘On the flip side, there have been concerns raised about the sustainability of some people’s retirement income withdrawal rates. So it is not impossible that ministers might even decide to increase the age limit for private pension access.’

What are the benefits of waiting another two years to retire?

‘Retiring at 55 is obviously an attractive prospect in many ways, but it is worth bearing in mind that any pension pot might have to last for several decades,’ said Steve Webb, in answer to a reader about his wife’s early retirement plans. 

‘Current figures suggest that a 55-year-old woman will, on average, live to 87, but she has a one in four chance of living to 94. In the latter case, the pension pot would need to last for nearly 40 years.

Ian Browne: ''It is illusory for most people to expect to be able to retire in their 50s unless they really have substantial private savings'

Ian Browne: ”It is illusory for most people to expect to be able to retire in their 50s unless they really have substantial private savings’

‘Given the figures above on average life expectancies, she might want to review whether retiring at 55 and potentially living on Isa savings for a couple of years is the best approach, or whether retiring at (say) 57 with a larger pension pot might not be a better option.’

Browne says: ‘Your pension pot may need to last you three decades or more in retirement, so it is really crucial to withdraw income steadily at a sustainable rate. Just because you can access the money in your mid-50s, doesn’t mean you should.’

He points out that if you take more than your 25 per cent tax-free cash, you will only be able to put away £4,000 a year and still automatically qualify for tax relief from then onward.

If you breach the £4,000 limit, known in official jargon as the Money Purchase Annual Allowance or MPAA, you could face a big tax bill down the line.

‘That is a major reason to keep your pension pot untouched if possible,’ says Browne.

‘Once they reach the latter stages of their career many people find it easier to save because they don’t have their children at home, for instance, or they can afford to downsize and cash in some equity in their home. So holding onto your full annual allowance can be really helpful.’

Carla Morris, financial planner at Brewin Dolphin, says: ‘As life expectancy increases, people’s pensions are going to have to last a lot longer. 

‘For example, with men expecting to live to 83 and women to 85, pensions may have to last around 30 years.

‘So even if you had your heart set on retiring at 55, you can spend the extra two years building up your investments and savings to provide even more funds to enjoy in your retirement.’

Carla Morris: 'Even if you had your heart set on retiring at 55, you can spend the extra two years building up your investments and savings'

Carla Morris: ‘Even if you had your heart set on retiring at 55, you can spend the extra two years building up your investments and savings’

How should you plan ahead if you want to retire or need cash at 55?

Check your mortgages or loans

If you have any that need to be repaid using your tax-free lump sum when you are 55, you should start talking to your lenders as soon as possible, says Carla Morris.

‘Discuss all the options available to you including the options to extend the term of the mortgage or loan. It is important that you are aware of what repayments may need to be made.’

Make other arrangements to cover university or school fees

‘People who are turning 55 when their children go to university may well have been thinking about using their tax-free cash to pay fees, or even to help pay school fees,’ says Morris.

‘If you are in this position, do make sure you make additional savings contributions to cover the costs. The earlier you start saving the better and using tax efficient investments such as Isas will ensure returns aren’t taxed.’

Review your pensions

Find out if your pension fund will be derisked or ‘lifestyled’, suggests Morris.

‘Some pension providers offer lifestyle funds which move the pension from higher to lower risk over the years, especially as you move towards retirement age.

‘If the provider has set a retirement age of 55, they may start changing the composition of the pension fund too early and you could lose out on some investment gains.’

Read a This is Money guide to derisking a pension, including whether to avoid this or call a halt if it doesn’t suit your plan to stay invested in retirement. 

Build up your Isas

Having savings outside of a pension wrapper gives you complete choice, says Ian Browne.

‘It is illusory for most people to expect to be able to retire in their 50s unless they really have substantial private savings.

‘Isas are much less generous than pensions because they don’t come with the same top-up in the form of tax relief.

‘The trade-off with a pension is that you get that savings boost from the Government, but you have to keep your money locked up for longer. With an Isa you can withdraw money to supplement your income at any time.’

TOP SIPPS FOR DIY PENSION INVESTORS

 

Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.



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Pension freedoms have given savers full access to their retirement savings from age 55 – but many people aged in their 40s now will have to wait an extra two years.

On the Government’s current timetable, the age when you can start tapping your private savings will rise to 57 in 2028, though it has not legislated for this yet.

That means anyone aged 47 or under must plan ahead if they want to retire earlier, or need cash for other purposes like paying off mortgages, home renovations or university fees for their children.

We look at ways to bridge the savings gap if you decide to retire at 55 anyway, or whether you should simply accept that you need to work longer and focus on building up your pension instead.

Pension freedom: People in their 40s who will be affected by the age limit rise to 57 must plan ahead if they want to retire earlier, or need cash for other purposes 

When is the age to access pensions rising to 57 – and will it actually happen?

Under current Government policy, it will increase the minimum age at which people can tap their private pension from 55 to 57 in 2028. 

That keeps it in line with the state pension age, which is scheduled to rise to 67 in that year.

But it implies a ‘cliff edge’ change to 57 in that year – albeit one people can see from a long way off – though there is no legislation to say this has to happen, explains former Pensions Minister Steve Webb.

He says the change could be brought forward, but it would be a shock if the age limit was moved overnight and applied immediately without any warning, because the Government has to give people time to plan ahead.

What is pension freedom? 

Pension freedom reforms have given over-55s greater power over how they spend, save or invest their retirement pots.

Key changes from April 2015 included removing the need to buy an annuity to provide income until you die, giving access to invest-and-drawdown schemes previously restricted to wealthier savers, and the axing of a 55 per cent ‘death tax’ on pension pots left invested.

The changes apply to people with ‘defined contribution’ or ‘money purchase’ pension schemes, which take contributions from both employer and employee and invest them to provide a pot of money at retirement.

They don’t apply to those with more generous gold-plated final salary or ‘defined benefit’ pensions which provide a guaranteed income after retirement.

However, those still saving into such schemes can transfer to DC schemes, provided they get financial advice if their pot is worth £30,000-plus. 

There has been an outcry over the decision to speed up two changes to women’s state pension age, and time them in quick succession – especially as many say they were sent no formal notification of the changes. 

Webb, now a partner at pension consultant LCP, says in a recent column for This is Money: ‘A future Government could decide to leave things at 55, in the knowledge that this would be popular and would also generate more tax revenue.

‘But it would be unwise to plan on the assumption that this would be the case.’

Ian Browne, pension expert at Quilter, says: ‘It has always been the government’s intention to raise the age at which savers can access their private pensions, and to do so in line with state pension age increases.

‘The logic behind this is that if the window between the two were to widen it would create a greater risk that people draw down their private pensions too quickly.’

Browne says that raising the age threshold for taking both private and state pensions is also based on the assumption that average life expectancy will continue to rise, but as it has slowed in recent years some people may begin to question that.

He adds that there is also a possibility the Government may decide that individuals should continue to have the freedom to use their private savings as early as age 55. 

Alternatively, it could phase in the change to 57 rather than suddenly switch it in April 2020 – or even put it back further.

‘If there is a “cliff edge” shift that would almost certainly leave some people frustrated if they turn 55 shortly after the cut-off point.

‘On the flip side, there have been concerns raised about the sustainability of some people’s retirement income withdrawal rates. So it is not impossible that ministers might even decide to increase the age limit for private pension access.’

What are the benefits of waiting another two years to retire?

‘Retiring at 55 is obviously an attractive prospect in many ways, but it is worth bearing in mind that any pension pot might have to last for several decades,’ said Steve Webb, in answer to a reader about his wife’s early retirement plans. 

‘Current figures suggest that a 55-year-old woman will, on average, live to 87, but she has a one in four chance of living to 94. In the latter case, the pension pot would need to last for nearly 40 years.

Ian Browne: ''It is illusory for most people to expect to be able to retire in their 50s unless they really have substantial private savings'

Ian Browne: ”It is illusory for most people to expect to be able to retire in their 50s unless they really have substantial private savings’

‘Given the figures above on average life expectancies, she might want to review whether retiring at 55 and potentially living on Isa savings for a couple of years is the best approach, or whether retiring at (say) 57 with a larger pension pot might not be a better option.’

Browne says: ‘Your pension pot may need to last you three decades or more in retirement, so it is really crucial to withdraw income steadily at a sustainable rate. Just because you can access the money in your mid-50s, doesn’t mean you should.’

He points out that if you take more than your 25 per cent tax-free cash, you will only be able to put away £4,000 a year and still automatically qualify for tax relief from then onward.

If you breach the £4,000 limit, known in official jargon as the Money Purchase Annual Allowance or MPAA, you could face a big tax bill down the line.

‘That is a major reason to keep your pension pot untouched if possible,’ says Browne.

‘Once they reach the latter stages of their career many people find it easier to save because they don’t have their children at home, for instance, or they can afford to downsize and cash in some equity in their home. So holding onto your full annual allowance can be really helpful.’

Carla Morris, financial planner at Brewin Dolphin, says: ‘As life expectancy increases, people’s pensions are going to have to last a lot longer. 

‘For example, with men expecting to live to 83 and women to 85, pensions may have to last around 30 years.

‘So even if you had your heart set on retiring at 55, you can spend the extra two years building up your investments and savings to provide even more funds to enjoy in your retirement.’

Carla Morris: 'Even if you had your heart set on retiring at 55, you can spend the extra two years building up your investments and savings'

Carla Morris: ‘Even if you had your heart set on retiring at 55, you can spend the extra two years building up your investments and savings’

How should you plan ahead if you want to retire or need cash at 55?

Check your mortgages or loans

If you have any that need to be repaid using your tax-free lump sum when you are 55, you should start talking to your lenders as soon as possible, says Carla Morris.

‘Discuss all the options available to you including the options to extend the term of the mortgage or loan. It is important that you are aware of what repayments may need to be made.’

Make other arrangements to cover university or school fees

‘People who are turning 55 when their children go to university may well have been thinking about using their tax-free cash to pay fees, or even to help pay school fees,’ says Morris.

‘If you are in this position, do make sure you make additional savings contributions to cover the costs. The earlier you start saving the better and using tax efficient investments such as Isas will ensure returns aren’t taxed.’

Review your pensions

Find out if your pension fund will be derisked or ‘lifestyled’, suggests Morris.

‘Some pension providers offer lifestyle funds which move the pension from higher to lower risk over the years, especially as you move towards retirement age.

‘If the provider has set a retirement age of 55, they may start changing the composition of the pension fund too early and you could lose out on some investment gains.’

Read a This is Money guide to derisking a pension, including whether to avoid this or call a halt if it doesn’t suit your plan to stay invested in retirement. 

Build up your Isas

Having savings outside of a pension wrapper gives you complete choice, says Ian Browne.

‘It is illusory for most people to expect to be able to retire in their 50s unless they really have substantial private savings.

‘Isas are much less generous than pensions because they don’t come with the same top-up in the form of tax relief.

‘The trade-off with a pension is that you get that savings boost from the Government, but you have to keep your money locked up for longer. With an Isa you can withdraw money to supplement your income at any time.’

TOP SIPPS FOR DIY PENSION INVESTORS

 

Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.



Source link

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