Hard-up workers could end up only being able to access their pension pot cash from the age of 60 in future, experts have told This is Money.
On Thursday, the Government confirmed that from 2028 the age at which people can access their pension money will rise from 55 to 57.
This means anyone currently 47 or under will have to wait an extra two years before they can hold of their hard-earned pension savings from previous jobs.
Speaking to This is Money, Moira O’Neill, head of personal finance at Interactive Investor, said it was ‘perfectly possible’ that the private pension age could rise to 60 if the state pension age climbs to age 70.
It’s going up: From 2028, the age for pension pot freedoms rises from 55 to 57
The increase in pension freedom age to 57 is designed to keep it ten years below the state pension age, which increases to 67 by 2028.
Steven Cameron, pensions director at Aegon told This is Money: ‘The Government has indicated it may increase the state pension age to 68 between 2037 and 2039 although this isn’t set in stone and is likely to be reviewed alongside improvements in life expectancy.
‘But it’s reasonable to assume any further increases in state pension age will also mean increases in pension freedom age. This is more likely than an early increase to age 60 which would have a greater impact on the retirement plans of a larger group of people.’
Gary Smith, a financial planner at Tilney Group, said an increase from 57 to 60 for pension pot access in future was ‘inevitable.’
If the age for pension freedoms is increased to 60 in future, it will be in line with the current age threshold for being able to access cash from a Lifetime Isa.
At present, there are only three ways to access cash from a Lifetime Isa without being slapped with a withdrawal charge, namely being aged 60 or over, buying your first ever home or being terminally ill with less than a year to live.
In a statement this week, Treasury minister John Glen said: ‘In 2014 the Government announced it would increase the minimum pension age to 57 from 2028, reflecting trends in longevity and encouraging individuals to remain in work, while also helping to ensure pension savings provide for later life.
‘That announcement set out the timetable for this change well in advance to enable people to make financial plans and will be legislated for in due course.’
Talk of the new 55 to 57 age threshold first surfaced back in 2014, but, as no legislation was introduced at the time, many were left wondering whether or not the change end up being implemented.
Mr Cameron, of Aegon, said: ‘This latest announcement confirms the change will happen meaning those retiring in future will have to wait longer to access their pension.
‘It will be particularly impactful on those who were due to reach their 55th birthday just after the cut off, sometime in 2028.’
He added: ‘It’s now imperative that both Government and industry make sure this change is clear to all those saving in pensions.
‘We can’t afford a repeat of the Government communication gaps which left many women to find out too late that their state pension age was increasing from 60 to 65.’
Under pressure: Chancellor Rishi Sunak is under pressure to balance the country’s books
Triple lock guarantee uncertainty
The future of the ‘triple lock’ that guarantees annual state pension increases of at least 2.5 per cent is rumoured to have caused a rift at the top of the Government.
The pledge is highly valued by elderly voters and Prime Minister Boris Johnson is reportedly keen to keep his election promise to maintain it for fear of a backlash.
But as rises are decided by whatever is the highest of price inflation, average earnings growth or 2.5 per cent, a big correction in pay levels after the Covid-19 crisis could lead to a shock spike in the state pension.
The prospect of making an outsize handout to pensioners as the rest of the nation remains hard up, and the need to scrape together some cash to pay for fighting the pandemic, are apparently weighing on Chancellor Rishi Sunak.
Triple lock: Guarantee on state pension increases could be weakened as wages take off again next year
Mr Smith of Tilney Group said he thinks there is a ‘real threat’ to the triple lock guarantee in its current form.
Mr Smith added: ‘The current, and future, Governments are going to have to come up with some way of increasing revenue to deal with the costs of dealing with the Covid-19 crisis.
‘It is unlikely that business taxes will be increased, as most businesses have already been adversely impacted by the current crisis, and the Government requires them to continue to employee people in the future.
‘Therefore, it is likely that personal taxes will be the route that the Chancellor will have to increase to meet the cost of Covid-19 bailouts, and this could result in the triple lock being attacked, albeit not necessarily being removed altogether.’
Meanwhile, Mr Cameron, of Aegon, saidhe thinks it would take a ‘very brave’ Chancellor and Prime Minister to scrap the triple lock guarantee in its entirety.
But, Mr Cameron said he also thinks the current formula for the triple lock could be ripe for change.
He said: ‘The formula was set in a very different pre Covid-19 age when price and earnings growth tended to be relatively stable year on year.
‘Blindly following that formula now as we move through and out of the coronavirus crisis with huge distortions to average earnings expected could create bizarre results which were never intended and which would fail any test of intergenerational fairness.
Predictions: Earnings and inflation predictions from Aegon in relation to the triple lock
‘If as a result of the furlough scheme we see a sharp dip in average earnings this year followed by a quick and full recovery the next, the triple lock would still grant pensioners a 2.5% minimum increase next year and potentially put them on track for a much higher increase in 2022, while many of those of working age might have simply regained their pre COVID-19 earnings.
‘Even a 2.5% increase might be seen as generous if both price inflation and earnings growth are much lower or even negative. Every 1% increase in the state pension costs the Government around £1bn for all future years. And with no fund to pay for state pensions, this needs to be collected from the working population’s National Insurance contributions.
‘In these unprecedented times, we may need some temporary adjustments.’
One temporary option would be to consider the triple lock over a two year rather one year period.
In essence, the Government could apply the triple lock as normal next April, but base the following year’s increase on two years’ worth of figures, to smooth out any artificial pay distortions caused by the furlough scheme.
That would still give pensioners a rise based on the highest of 2.5 per cent, wage growth or the inflation rate, but just calculated over a longer period.
Ms O’Neill, of Interactive Investor, thinks the two-year ‘smoothing’ option could be a good idea.
She said: ‘The triple lock formula was devised pre-COVID and it does need a fresh look to iron out any anomalies that may be introduced by our unprecedented economic circumstances.
‘I think some of the suggestions put forward around smoothing, for example a two-year averaging policy, seem a sensible approach.’
Aegon’s Mr Cameron said: ‘If the PM and Chancellor are thinking of any such change, it will be important to announce this sooner rather than later. Pensioners are much more likely to accept a two year averaging as fair if they’re told of it now, not in a year’s time.’