Increase in pension age could delay your retirement

In October 2020, the State Pension Age (SPA) for both men and women was increased from age 65 to 66. There is also a further planned increase to age 67 between 2026 and 2028. These changes are part of the framework where the SPA is reviewed by the government at least every 5 years as outlined in The Pensions Act 2014.

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Changes to the SPA mean that anyone born between 6th October 1954 and 5th April 1960 will have to wait until their 66th birthday before they are able to claim their State Pension. Based on the projected increase of the SPA from 66 to 67, people born between 6th March 1961 and 5th April 1977 will have to wait until they reach age 67 to claim their State Pensions.

Despite these timetables seeming rather specific, it is worth pointing out that they may be subject to change, and you should check out the State Pension Calculator to find out when you can start to claim your State Pension.

Additionally, the age at which individuals can access their private pensions, i.e. occupational pensions from your employer or personal pensions, is also reviewed by the government and is likely to increase from age 55 to 57 on 6th April 2028. Assuming that the government employs a ‘cliff-edge’ strategy with this planned increase, this would mean that anyone born after 5th April 1973 will have to wait an extra two years before they can access their private pension pots.

The changes to the age at which the State Pension and private pensions can be accessed is rather complex. However, fundamentally they simply mean that individuals will have to wait longer to access their pensions, meaning that there are some very important financial considerations to bear in mind.

What considerations do you now need to make?  

Understandably, the increase to the age at which someone can access their private pension may leave many questioning if they must push back their retirement plans to at least 57. However, there is no ‘one size fits all’ answer for everybody as it really does depend on your current circumstances and how your financial affairs are structured.

Let’s look at an example 

Mr & Mrs Smith are currently both age 45 and they each intend to retire in 10 years’ time. They have accumulated a number of private pensions throughout their careers, as well as regularly making savings to both their current cash accounts and investment portfolios.

Based on their age and the proposed changes they will now not be able to draw pension benefits until age 57, which is 2 years longer than what they had intended as they both wanted to retire and draw benefits at age 55.

They were not previously aware of the changes to pension legislation, but upon hearing the news, they now believe that they will have to work for longer than they had wanted.

However, all hope is not lost. It may be the case that Mr & Mrs Smith have enough money in their savings and investments to bridge the 2-year gap.  

The first step in finding out whether they would still be able to retire at age 55 would be to produce a cash flow model detailing all their assets and if they would be able to fund their spending plans throughout retirement based on a number of assumptions such as income requirements, inflation and investment returns.  

If it turns out they would not be able to retire early, there are a number of steps that the couple can take to ensure that they meet their goal of being able to enjoy an early retirement.

The first could be ensuring that they have an appropriate savings strategy in place meaning that they will have enough money available for when they wish to retire at age 55. That might mean increasing contributions to their investment or savings accounts, adding a lump sum to one of their bank accounts, cutting down on some of their current spending, or a combination of all three.

A second avenue to explore is ensuring that the couple’s investments are working as hard as possible so that they are in a position to be able to draw upon their investments, rather than their pensions, to supplement their income needs at age 55.

In practise, this would mean ensuring that their investments are appropriately invested so that they have the best chance to grow sufficiently to meet their spending needs in the future when they do need to access the money.

In order to do so, it would be important for Mr and Mrs Smith to understand their specific attitudes to investment risk which will be based on their knowledge and experience of investing, their tolerance for risk, capacity for loss and need for return. This is an important step to ensure that the couple will be comfortable with their investment decisions whilst maximising their chances of achieving their long-term financial objective of retiring at age 55.

It’s equally important to ensure that their pensions can deliver on their expectations. Ensuring their pension holdings are invested appropriately is imperative as they won’t be able to access their private pensions at 55 and will also have to wait longer before they receive their State Pension.

When approaching retirement, it is important for individuals to understand the options available to them when accessing their private pension benefits. Some individuals may prefer to purchase an annuity to provide them with a stable source of income for life. Whereas others may prefer to take their benefits via lump sum payments known as uncrystallised funds pension lump sums (UFPLS), of which 25% is usually tax-free and the rest is taxed as income via PAYE. The final option to take benefits is via flexi-access drawdown, which allows individuals to choose when they would like to take their tax-free cash entitlement. This is is usually 25% of their pension fund with a maximum tax-free cash allowance of £268,275 for individuals with no pension protections. An individual’s circumstances will drive which option, or combination of options, might be appropriate. Therefore, it is always best to speak to a financial adviser to help determine the right route for you.

These are only a few suggestions as to how Mr & Mrs Smith could improve their chances of achieving their goal of retiring early at 55. There are many avenues they could explore in order to do so. However, it may be difficult for them to identify which works best for them. Working with a qualified financial adviser can help to inform you on the options available to you as well as help you decide which is the most appropriate for you based on your personal circumstances and objectives.

If you’re concerned about changes in the pension age or you’d simply like to learn more about what your future financial plan may look like, why not get in touch. We’re currently offering anyone with £100,000 or more in savings, pensions or investments the opportunity for your own personal FREE cash flow forecasting plan worth up to £500. 

Or you can have a look at our retirement calculator.

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Please note: A pension is a long term investment, the value of investments can fall as well as rise. You may not get back what you invest. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. The Financial Conduct Authority (FCA) does not regulate cash flow planning.