Under current Pension Freedom rules, individuals over the age of 55 can access their pensions how and when they choose. However, the government has recently confirmed that this age is set to rise to 57 by 2028. This means the change will impact all workers currently aged 47 and under.
If you’re going to be affected, you might be wondering how it will impact your retirement plans. Read on to find out what the new retirement age will mean for you.
The minimum pension age will rise from 55 to 57 in 2028
The government introduced Pension Freedoms in April 2015 and gave holders of Defined Contribution pension schemes greater access to their cash, such as being able to make withdrawals from the age of 55.
In 2014, the government proposed a change to the age but did not legislate it, leaving many to speculate whether the proposal would actually go ahead. Now, the government has confirmed that the minimum age for making withdrawals from a pension fund is set to rise from 55 to 57 in 2028.
The government said that it is raising the pension age to encourage individuals to stay in work and ensure that their pension savings provide for them throughout retirement. Raising the minimum age by two years will mean that workers are paying into their funds for longer and the pot will have to last two years less in retirement.
It’s not yet clear how the government will implement the change, but it is likely to be a gradual increase, similar to the increase of the State Pension age. This approach would see the minimum age gradually increase a month at a time from 55 to 57 with people in their late 40s being able to draw pensions from different ages depending on their exact date of birth.
A gradual phased-in approach would allow the government to avoid a ‘cliff-edge’ scenario, which would likely be unpopular with people who narrowly miss the cut-off point.
The raising of the minimum pension age is to reflect ‘changes in longevity’
One of the main reasons why the government is implementing the change is to make sure that people have enough pension savings to provide for them throughout their retirement. As people live longer, pensions will also have to support people for a longer period too.
The Economic Secretary to the Treasury, Stephen Timms, was quoted in FT Adviser as saying the change reflected ‘trends in longevity’. He also stated that raising the minimum pension age to 57 would encourage people to work longer, which would ensure that their pensions would be able to provide for them throughout their retirement.
This may help lay some people’s fears to rest, as a recent study by insurance provider Aviva found that 58% of Brits aged between 45 and 60 are worried that their pensions will not be enough to provide for a comfortable retirement.
What the change means for you
The average retirement age in the UK is around 65, so the raising of the minimum pension age from 55 to 57 may not affect many people.
If you’re not planning to retire at the minimum pension age, the change will make little meaningful difference to you. However, it is important to avoid the temptation of making withdrawals from your pension pot just because you can.
A 2019 study by Canada Life, reported in This is Money, found that almost a quarter (24%) of over-55s had dipped into their pension fund despite still paying into it. Withdrawing large sums of money from your pension without fully considering the long-term consequences could mean that you can’t support a comfortable lifestyle in retirement when the time comes.
However, if you’re one of the people lucky enough to have a pension fund large enough to retire at 55, from 2028 you will have to work for an extra two years before you can start to draw from your pension.
While you may be facing the prospect of working an extra two years than you had planned to, there is at least a silver lining to this change. Working for two extra years means that your pension will be bolstered with two extra years of contributions, which means that your pension fund will be more able to support the lifestyle you want when you retire.
If you had hoped to retire at 55, you may need to revisit your retirement plans. Speaking to a financial planner can help you to re-evaluate your financial situation in light of the change and help you plan for your retirement accordingly.
Get in touch
If you’re concerned that your pension won’t be enough to give you a comfortable lifestyle throughout your retirement, we can help. Email email@example.com or call us on 01454 416653.