Few of us expect to give up work altogether in our 50s. But a growing number of us are dipping into our pension before retirement age.
Currently, savers can access their private pension at 55 – more than a decade before their state pension.
But, last week, ministers confirmed new rules that will force anyone now aged 47 or younger to wait an extra two years.
Planning ahead: While very few people actually retire at 55, more of us are taking advantage of the pension freedoms so that they can get their finances in order before retirement
It could mean thousands of savers now need to rethink their retirement plans, and may face unexpected costs. Here, Money Mail explains what you need to know about the new rules…
What is changing?
Now, savers can exercise their ‘pension freedoms’ when they reach 55. They have the right to take 25 per cent of their personal pot as a tax-free lump sum.
Any withdrawals over this will be taxed at their current income tax level, making it an unwise choice for most Britons.
Savers can leave the rest invested in their current plan or use it to buy a more personalised investment vehicle, such as an annuity that provides a guaranteed income for life.
The new rules, set to be enforced in 2028, will mean you can’t get hold of your cash until you’re 57.
Is 55 too early?
In the first two years that this early access was available, some 33,000 savers took a tax-free lump sum.
Some used this to pay off a mortgage, finance home improvements, or help their children buy a flat.
The decision to make use of pension freedoms isn’t to be taken lightly, as research suggests that savers underestimate retirement living costs by around 15 pc.
But former pensions minister Steve Webb, who is now an advisor with consultancy Lane Clark & Peacock, says most of those accessing their pot early are cautious.
‘They typically want to use the tax-free money for what they need, then put the rest in the bank or a cash ISA,’ he says.
A recent survey revealed one in ten workers now plan to take an early lump sum due to the pandemic.
With around 300,000 homeowners aged between 51 and 65 expected to use their pensions to clear mortgages, the change could be bad news for anyone with an interest-only deal
Why is IT feared?
Experts worry the new rules could disadvantage some savers. With around 300,000 homeowners aged 51 to 65 expected to use their pensions to clear their mortgages, those with an interest-only one may face two more years of monthly payments.
The Government hasn’t clarified whether the new rules will apply overnight or be phased in gradually.
There are questions, too, as to whether someone who turns 55 early in 2028, or just beforehand, will still retain the right to dip into their pension after the age change.
Steven Cameron, pensions director at Aegon, warns that if pension owners only have access to their money during a short window – i.e. between their 55th birthday and the cut-off date – they may want to get hold of the cash while they can.
‘Deferring accessing your pension typically means you will have more money for retirement, so the Government must ensure changes don’t incentivise those affected to dash for their cash,’ he says.
How can I adapt?
The prospect of two years of unexpected costs is a reminder of why it pays to have a back-up plan.
‘Savers who have a cash ISA will have more flexibility to plug any short-term gap in income,’ says Moira O’Neill, from investment platform Interactive Investor.
But they ought not to forgo pension contributions in order to boost their income, as they’ll miss out on vital tax relief and employment top-ups.
Should my wife use an Isa to bridge the pension gap to 57?
Compared with a pension, saving in a Isa is a relatively tax-inefficient route as you get no tax relief on the contributions and no employer contributions, says our pensions columnist Steve Webb.
James Norton, a senior investment planner with Vanguard, also warns that savers who rush to rejig their wider portfolio, in the hope of getting higher returns, could damage their retirement prospects further.
The Government says the timetable has been set out well in advance so that savers can plan. It has promised to legislate ‘in due course’ and provide further details.
The Government will be keen to avoid another WASPI-style backlash, which saw campaigners say it failed to do enough to alert women affected by a rise in the state pension age.
‘The Government needs to make sure people are fully aware — especially those in their late 40s who may have made plans based on the current rules,’ says Mr Webb.