by Martyn Paterson
Chartered Financial Planner
What will the revised normal minimum pension age mean for your planned retirement date? Now’s the time to start planning.
Preparing for a ‘cliff edge’
The UK has an ageing population – nearly a quarter of us will be over 65 by the middle of the next decade. Just as the state pension age rises to account for people living longer and retiring later, the UK government is raising the minimum age you can withdraw from a private scheme without facing higher charges.
The normal minimum pension age (NMPA) rises from 55 to 57 years old in April 2028. It’s not the big leap we saw in 2010 (when it rose from 50 to 55). There are also seven years to prepare.
But even so, with no phased introduction, this could still be a shock for savers who are in the final stages of retirement planning. Some pensions experts are warning they could face a ‘cliff edge’ when the age hike comes in.
To bridge the gap, it’s important to make plans now.
Who does this affect?
In general, this affects anyone born after 5 April 1973 – i.e., those who turn 55 on 6 April 2028, when the new NMPA is introduced (although there are some exemptions, such as people working for the emergency services).
Savers born between April ‘71 and April ‘73 have a small window of opportunity to take benefits before the cut off. But only as long as they access their pension during this period. If not, they can’t do so until they turn 57.
So there’s the chance these changes could prove to be an extra headache. If you reach 55 ahead of the deadline date and start taking benefits under a phased drawdown, you might then have to stop again if you’re still below the minimum age in April 2028.
Can you avoid this?
There is a way around the changes if you’re in a scheme where the pension age is protected by what’s known as ‘unqualified right’. That allows you to claim after the age of 55, even once you’ve reached the cut-off date.
You’re also allowed to transfer your pension into one of these eligible schemes and benefit from the different age rules.
However, there are a couple of caveats to this: the ‘unqualified right’ to the pension benefits must have been in place from 11 February 2021, and individuals must also join these schemes by 5 April 2023.
But… think before you jump
The reality is most self-invested personal pensions (SIPPs) and personal providers are unlikely to have protected pension ages (PPAs), most will instead follow the NMPA. As a result, your choice of what to go for is likely to be limited.
That means you need to think carefully about going down the transfer route. You could find a pension with a PPA has less favourable terms than your current scheme. Is it worth sticking to your schedule but retiring with less?
In addition, you also need to be mindful of any inheritance tax complications that could crop up as a result of transferring your pension.
If transfer isn’t an option, there are other avenues available. In fact, if you want to retire at 55 there may be alternatives to tapping into your pension early that are more tax efficient.
For example, you could bridge the two-year gap by making use of other collective investment schemes, bonds, or ISAs that you’ve paid into, that give you income without touching your pension. This has another potential advantage, as they can help reduce your IHT liabilities.
The other crucial point to consider is whether you can hold off. While retiring two years earlier can be an attractive option, the longer the pension remains invested, the more capital you can accumulate.
Essentially there are four things you need to look at before April 2028:
1) Check your pension schemes. Is your retirement age protected? One client of ours, a couple looking to retire at the same time, had around 12-13 schemes between them. It’s easy to accrue so many separate schemes over a lifetime of employment. Consolidation might be a sensible option even if you’re not planning to retire at 55.
2) Are there schemes you can transfer into? Is the minimum age protected by unqualified right? Most importantly, you need to be sure wherever you transfer your pension won’t leave your retirement savings worse off than before.
3) Are there other non-pension savings which can help bridge the gap? Any investments accrued in other tax wrappers can help provide you a crucial income in that two-year period.
4) And finally, can it wait? On balance, do you need to retire at 55, or is there an extra financial benefit in holding off for a further two years?
Whatever your decision, and whatever works best for you, taking impartial financial advice on the next steps is the best move. Speak to us because we’d love to help.