Lockdown has led many people to rethink how they want to spend their time and money, and for some that includes when, how or even whether they want to retire from work.
Some of our clients have told us that working from home and losing the regular commute has given their career a new lease of life, and so perhaps they are keen to go on working longer than they had previously planned.
Others have told us that lockdown has encouraged them to focus their financial planning on achieving earlier retirement. For those born from 6 April 1971 onwards and thinking about earlier retirement, the earliest age at which pensions can typically be accessed will change later this decade.
Currently, normal minimum pension age (NMPA) for private pensions – which includes SIPPs (self-invested personal pensions) and workplace pensions, but not state pensions* – is age 55, and earlier access is normally only possible if permanently unable to work due to ill health.
Last month, the government published draft legislation confirming that NMPA is to increase to age 57 from 6 April 2028, as was first mooted in 2014. The legislation is likely to become law over the next year.
Those born before 6 April 1971 will not be affected, as they will already be age 57 before the changes come into force. But for those who are younger, pensions could become inaccessible for up to an extra 2 years, meaning those thinking of retiring before age 57 could have to ensure they have other non-pension sources of capital or income to tide them over until then. This may also have implications for some clients approaching (or exceeding) their Lifetime Allowance, or who had plans for the tax-free cash from their pensions at age 55, even if planning to carry on working past that age.
The three key exceptions. Firstly, the few who already have a protected pension age under age 55 will not be affected. Secondly, the NMPA increase will not apply to armed forces, police or firefighter pension schemes, who will have a protected pension age. Thirdly, the increase will not apply to other pension schemes where the scheme rules, as at 11 February 2021, provided an “unqualified right” to access the pension from age 55 (or an earlier age): they too will have a protected pension age.
Focusing on the third of these, schemes with an unqualified right to access from age 55 appear few and far between. Most schemes just permit access from NMPA onwards (whatever that may be), a few other schemes may have provided a right to access from age 55 but only with the approval of the trustees. In such cases, no unqualified right exists.
However, one of the schemes we often recommend to clients did have an unqualified right to access from age 55 in its scheme rules as at 11 February 2021.
Furthermore, the government’s draft legislation lays out plans to allow anyone who contributes to or transfers into such a scheme by 5 April 2023 to be able to access the benefits in that scheme as at 5 April 2023 (and any further growth or contributions to that same scheme from 6 April 2023 onwards) from a minimum pension age of age 55, rather than age 57.
In the other words, the government’s plans to increase the NMPA are set to include a deliberate window of opportunity to allow those who might be adversely affected to plan ahead and avoid the NMPA increase, and to be able to access their pension from age 55 regardless.
After 5 April 2023, it will be too late, and for those without a protected pension age then, the NMPA of age 57 will apply from 6 April 2028.
All of the above said, many of our clients will not necessarily need to access their pensions at the earliest opportunity and indeed often they would be poorly advised to do so. Pensions offer outstanding tax advantages**, sometimes even when the Lifetime Allowance has been exceeded, and most clients have a combination of pension and non-pension assets.
As a result, often it makes sense to access pensions last (often well after age 55 or age 57), and to spend from non-pension assets first, such as from cash savings, taxable investment accounts, ISAs and insurance-based investment bonds. Your existing pension arrangements may also have specific features or benefits, which might mean that transferring to another scheme with that unqualified right to access at age 55 might not be appropriate, or even possible, so good advice is essential.
The value of putting in place (and keeping up-to-date) a financial plan – and keeping on top of the latest tax and legislative changes – can run to a difference of many hundreds of thousands of pounds (if not millions) over the course of retirement. More importantly, financial planning can help you to identify, prioritise and achieve what’s important to you in life – whether that’s retiring earlier, being able to maintain a certain lifestyle, a special purchase, or passing on money to help family, friends or charities.
If you have any questions in terms of whether the NMPA increase in 2028 may affect you, considering steps to lock in a protected pension age of age 55 or wish to review your wider financial planning around retirement, of course, please do not hesitate to get in touch.
* The state pension works differently to private pensions, and state pension age (the earliest age you can receive your state pension) is different to NMPA. State pension age is currently age 66 for both men and women, but is due to increase further from 2026 onwards. If you have any questions on state pensions, of course, please contact us.
** Money you put into your pension can reduce your tax bill today, investment growth within pensions is broadly tax-free and you can usually take 25% of your pension tax-free when you come to retire. Pensions are also not generally subject to inheritance tax.
All of this means that investing through a pension often means you end up with more (and the taxman ends up with less), relative to investing elsewhere. For further details, of course, please contact us.
Update: The government confirmed on 4 November 2021 that, rather than permitting individuals to take action up until 5 April 2023 to protect a right to access from age 55, as it had previously proposed, instead it was amending its draft legislation to close the window to do so with immediate effect. Therefore, unless there are further changes to the legislation before it is signed into law, individuals must have been members of a pension scheme with a protected pension age of age 55 on 4 November 2021 (not 5 April 2023 as mentioned above), otherwise after 6 April 2028 they will only be able to access their pensions from age 57 instead.
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