For more than 50 years, it’s been possible to start taking income from your pension fund before the time you start receiving your State Pension.
At one stage, it was possible to start taking your benefits from as young as 50 although, since 2006 it’s been from age 55.
This has meant flexibility in terms of your retirement planning, and this flexibility increased when the government announced new Pension Freedoms in 2014, which became law the following year.
The new freedoms meant that you weren’t restricted in the amount you could take from your fund in one go – you may recall a pensions minister talking about buying a Lamborghini if you wanted to!
More than £35 billion has been taken out of pension schemes since then – including nearly £10 billion in the 2019/2020 tax year – as people have made use of this new flexibility.
At the same time as announcing Pension Freedoms, there was another, less publicised pension announcement – namely that the earliest age you would be able to access your pension fund would be going up in 2028, from 55 to 57.
In a written statement published in September, the Pensions Minister, John Glen, has again confirmed that this is still the case, although the actual legislation hasn’t yet been published. The expectation is that it will be included in a white paper in the first half of next year.
If you were born after 1972, the changes will affect you
Until the government publishes the full details and dates, we won’t know exactly who this change will impact.
However, it’s clear that, if you were born in 1972 or after, you should be taking the increase from 55 to 57 into consideration in your retirement planning, especially if you were planning on taking benefits from your pension from the age of 55.
The changes mean that you may want to consider diverting some of your future pension contributions between then and now into other products that aren’t age-restricted.
One possible solution, for example, may be to divert a proportion of your current pension contributions into an ISA, which has no age restriction of this kind. You’ll then be able to access this fund, tax-free, at age 55. The current annual ISA allowance is £20,000 per person, which provides plenty of scope for this kind of arrangement.
Here are a couple of examples to illustrate this:
Example 1
- Andrew was born in 1973 and is currently 47 years old. He wants a lump sum of £30,000 in 2028 to help cover the university fees of his son who will reach 18 then. He was planning to take this from his personal pension fund.
- He still wants to maximise pension contributions as far as possible, so he diverts a proportion of his current pension contributions into an ISA – £10,000 a year for three years.
- He’ll then be able to take the ISA benefits in 2028 free of tax.
Something else to bear in mind is the age difference between yourself and your spouse.
If one of you reaches age 55 before 2028 you could make pension contributions on their behalf so that the fund will be accessible in 2027 or before. Remember the maximum contribution is 100% of an individual’s annual salary or £3,600 – whichever is higher.
So, following on from Andrew’s situation above:
Example 2
- Andrew’s wife, Marie, is a year older than him, born in 1972. She will therefore reach 55 in 2027, so will be able to take money from a pension fund at that time.
- Marie works part-time and earns £12,000 a year, so anything up to that amount can be paid into her pension.
- Remember she’ll get tax relief on contributions, so only £9,600 needs to be paid, and the rest will come from tax relief from the government.
You’ll need to consider the taxation position of both parties, especially if one of you is a higher-rate taxpayer – with the associated benefit from higher-rate tax relief on contributions.
Your alternative is to create your plan assuming that you’ll be working an additional two years and retiring at age 57 rather than age 55.
Hopefully, however, this has given you an idea of what might be possible with some planning ahead.
If you think this change might impact you, we’d strongly recommend you start a conversation about it now. Eight years is a decent amount of time to be able to make any changes to your retirement planning without it becoming too financially onerous or requiring any big changes to your arrangements.
Get in touch
If you have any questions about how the rise in retirement age will affect your plans, please get in touch. Email admin@stonegatewealth.co.uk or call us on 01785 876222.
Please note
A pension is a long-term investment not normally accessible until 55. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
The Financial Conduct Authority does not regulate tax advice.