People in their 40s are in danger of seeing retirement plans upended because they don’t know the minimum age to tap private pensions will rise to 57 in six years’ time.
Four in five fortysomethings have no idea the Government plans to increase the minimum pension age for accessing workplace and personal retirement savings from 55 in 2028, new research reveals.
‘Many of those seeking to draw benefits as soon as possible may be shocked to learn that they will have to wait,’ warns the Pensions Management Institute.
Retirement planning: The Government will increase the minimum age at which people can access their private pensions from 55 to 57 in 2028.
The PMI, a body for pensions industry professionals, found that 18 per cent in a survey of 2,000 workers aged 40-49 knew the minimum pension age for accessing private pensions is set to increase in a few years’ time.
However, just 4 per cent could correctly identify the current minimum age of 55, indicating a wider lack of awareness about retirement rules in this age group.
PMI president Lesley Alexander says: ‘The results of this research are particularly worrying, as they suggest strongly that the Government has failed to make the general public aware of a significant change in pensions policy.
‘This news comes just six months after the Parliamentary and Health Service Ombudsman judged that Department for Work and Pensions was guilty of maladministration over its failure to provide adequate notice of the change to state pension age for women born in the 1950s.
‘There is very real potential for another embarrassment.’
>>>How do you bridge the savings gap if you decide to retire at 55 anyway? Find out below
How will the Government plans work?
The Treasury first announced in 2014 that the Government would increase the minimum age at which people can access their private pension from 55 to 57 in 2028.
It confirmed its intention and launched a consultation in February 2020.
Last November, it closed a loophole to avoid confusion and the risk of fraudsters exploiting savers.
Under the initial plans, people affected by the change who transferred to a scheme with a ‘protected’ pension age’ by April 2023 could gain access to their money at the old lower age.
A barrage of industry criticism about the risk of fraudsters encouraging people to make transfers on the back of this prompted a rethink.
The Treasury announced that unless you were currently in the middle of doing a pension transfer, the option of doing that to still benefit from an age 55 threshold was removed with immediate effect.
However, industry critics warn there are still potential pitfalls for savers affected by the change to when they can first make withdrawals from private pension pots.
The PMI says the increase to the pension age to 57 is complicated because it will not apply to everyone.
Those earning benefits in a public service pension scheme, and those who are members of some private sector arrangements, will continue to have a pension age of 55, it explains.
Alexander says: ‘It is vital that the general public understands clearly what their retirement choices are.
‘With the pensions dashboard due to arrive in 2023 – giving people the chance to review all their pension savings in a single place – it will only cause confusion when people learn that they will become eligible to draw benefits at different ages.
‘The need for a new communication programme to explain this to the public has become urgent.’
Tom Selby, head of retirement policy at AJ Bell, branded the Government plans ‘bonkers’ in an article for This is Money
He points out that people who are currently in a scheme with a protected pension age and then later transfer might end up in a scheme with two different minimum pension ages.
Industry body the Association of British Insurers says: ‘Most savers have more than one pension pot and millions will now have a mix, with some pots they can access at age 55, and others where they need to wait to 57 making it harder to plan for retirement.
‘It is vital that Government and the pension sector work together closely to ensure that customers are clear about their private pension position and when they can access their money.’
Steve Webb, a former Pensions Minister and now a partner at LCP, wrote a column for This is Money explaining the age change – see the box on the right.
He says: ‘It would be easier if the Government simply left things as they are and allowed people to access their pension at 55 if they wished.’
What does the Government say?
‘We announced the change in the normal minimum pension age to 57 in 2014, 14 years in advance of the change to give people time to make financial plans,’ says a Government spokesperson.
‘We are revolutionising how consumers keep track of their pension information by introducing pensions dashboards – a single online place for people to access via their digital device at any time, putting the saver more in control and transforming how they think and plan for their retirement.’
Pension dashboards, originally expected in 2019, are due to be introduced in 2023. These are intended to allow people to see their retirement savings at a glance online.
Workplace savings have been boosted by an additional £28.4billion a year since the launch of auto-enrolment in 2012.
Since then, more than 10million more people have signed up for pensions, which employers have to provide for staff unless they actively opt out.
How do you plug the two-year gap?
Carla Morris: ‘Even if you had your heart set on retiring at 55, you can spend the extra two years building up your investments and savings’
This is Money looked at how savers could bridge the gap between 55 and 57 if they want to retire early or need cash here.
Pension experts offered the following advice.
1. Check your mortgages or loans
If you have any that need to be repaid using your tax-free lump sum when you are 55, you should start talking to your lenders as soon as possible, said Carla Morris, wealth director at Brewin Dolphin.
‘Discuss all the options available to you including the options to extend the term of the mortgage or loan. It is important that you are aware of what repayments may need to be made.’
2. Make other arrangements to cover university or school fees
‘People who are turning 55 when their children go to university may well have been thinking about using their tax-free cash to pay fees, or even to help pay school fees,’ said Morris.
‘If you are in this position, do make sure you make additional savings contributions to cover the costs. The earlier you start saving the better and using tax efficient investments such as Isas will ensure returns aren’t taxed.’
3. Review your pensions
Find out if your pension fund will be derisked or ‘lifestyled’, suggested Morris.
‘Some pension providers offer lifestyle funds which move the pension from higher to lower risk over the years, especially as you move towards retirement age.
‘If the provider has set a retirement age of 55, they may start changing the composition of the pension fund too early and you could lose out on some investment gains.’
Read a This is Money guide to derisking a pension, including whether to avoid this or call a halt if it doesn’t suit your plan to stay invested in retirement.
Build up your Isas
Having savings outside of a pension wrapper gives you complete choice, said Ian Browne, pension expert at Quilter.
‘It is illusory for most people to expect to be able to retire in their 50s unless they really have substantial private savings.
‘Isas are much less generous than pensions because they don’t come with the same top-up in the form of tax relief.
‘The trade-off with a pension is that you get that savings boost from the Government, but you have to keep your money locked up for longer. With an Isa you can withdraw money to supplement your income at any time.’
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