In 2015, the government introduced Pension Freedoms which allowed people over the age of 55 to have greater flexibility with how they drew income at retirement. However, in recent months they have announced that this age is set to rise to 57 by 2028.
If you’re going to be affected by this change, it could have a significant impact on your retirement plans. Read on to find out what the new retirement age may mean for you.
The pension age is being changed to reflect “trends in longevity”
When the government implemented Pensions Freedoms in 2015, it gave the holders of defined contribution pension schemes greater access to their cash from the age of 55.
Since then, the government has reconsidered the age at which they believe it is feasible to sustainably retire. The Economic Secretary to the Treasury, John Glenn, was quoted in FT Adviser as saying that the change in government policy reflected “trends in longevity”.
As people now live longer than in previous decades, pensions have to support people for a much longer period too.
The government hopes that this move will encourage people to work for longer, which will give them a greater amount of time to build up their wealth before they retire. This should help people to live a sustainable lifestyle in retirement.
This may help lay some people’s fears to rest, as a recent study by insurance provider Aviva found that 58% of Brits aged between 45 and 60 are worried that their pensions will not be enough to provide them with a comfortable retirement.
It is likely that the minimum age will be gradually increased to prevent a “cliff edge”
Raising the minimum age for retirement by two years will mean that not only will a pension have to last two fewer years in retirement, but workers will also have longer to contribute. Hopefully, this will help many people be able to enjoy a comfortable and sustainable lifestyle when they decide to stop working.
However, it isn’t yet clear how the government plans to implement the change. A likely solution will be to gradually increase it, similarly to how they increased the State Pension Age.
This approach would see the minimum age increase one month at a time from 55 to 57, with people in their late 40s being able to draw their pensions at different ages, depending on their exact date of birth.
This gradual phased approach would allow the government to avoid a “cliff-edge” scenario, which would likely be unpopular with those who narrowly miss the cut-off date.
The change may mean you need to reassess your retirement plans
In the UK, the average age of retirement is around 65, which means that raising the minimum pension age from 55 to 57 won’t affect everyone.
If you aren’t planning on retiring when you reach the minimum pension age, this change will have very little real effect on your retirement plans. However, one important thing to bear in mind is resisting the urge to make withdrawals from your pension fund just because you have access to it.
A 2019 study by Canada Life, reported in This is Money, found that almost a quarter of over-55s in the UK had dipped into their pension fund despite still paying into it.
This can pose a problem, as you’re essentially trading long-term security for short-term comfort. Withdrawing large sums of money from your pension fund, without fully considering the long-term consequences of this, may mean that you can’t support a comfortable lifestyle in retirement when the time comes.
If you’re in the fortunate position of having a pension fund that is large enough for you to retire at 55, from 2028 you will have to work for an extra two years before you can start to make withdrawals from your pension.
While the change means that you may be facing the prospect of two more years in work than you had originally planned, there is a silver lining.
Those extra years of work mean that your pension fund will be boosted by an extra two years of contributions. This extra wealth may help to ensure that your pension fund will be more able to support the lifestyle you want when you do retire.
If you had been hoping to retire at 55, you may need to reassess your retirement plans. Speaking to a financial adviser can be useful here, as they can help you to re-evaluate your finances in light of the change and help you to plan for your retirement accordingly.
Get in touch
If you need to reassess your retirement plans in light of the change to the minimum retirement age, get in touch. Please email firstname.lastname@example.org or call 0115 933 8433.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.