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You might have heard whisperings recently about a rise in the private pension age (that is, the age at which you’ll be able to draw on the money that you’ve been saving for retirement).
If you’re nearing retirement age, or have already begun to start making plans for it, this will naturally be something that you need to have all the details on. So, what does a rise in the private pension age mean? When should you expect the changes to come in? And, mostly importantly, what will it mean for your future plans?
Here, we’ll shed some light on the changes that are expected to come into effect in the next few years…
Budgeting for your retirement is boring but essential. Remember to think about your essential bills, future holiday plans, and even costs such as going out for dinner – then multiply that by at least thirty years to work out how much cash you’ll need for a comfortable retirement. Now, think about what happens when it turns out you can’t retire when you initially planned: that’s what could happen!
It’s been confirmed: the private pension age is set to rise from 55 to 57. This means that those with personal or workplace pensions will be unable to draw money from them until they reach the age of 57 – two years later than previously.
This is the case whether or not you still plan to retire at 55. If you’re determined to stick to this plan, you may need to consider other ways to fund yourself in the interim (depending, of course, on whether the changes have come in by the time you retire).
The Government confirmed in 2014 that it would be increasing the private pension age to 57, so these changes aren’t exactly new news. But with pension freedoms being introduced in 2015 in order to give people more choice about how they use their pot, this confirmation might understandably have been lost in the noise. With the twin issues of Brexit and COVID also taking up pretty much all our attention this year, we can’t blame anyone for forgetting about this completely.
So, what happens now? Six years after confirming the increased pension age, in September this year (2020) the Government appeared to further the conversation by pointing out that the legislation that will be required to enforce the changes will be processed “in due course”. It’s now confirmed that the age rise will come into force in 2028.
So what should you do if you have a private pension plan? The experts have emphasised that those most likely to be affected are those who turn 55 after 2028. If you’re hitting this birthday before that, you’ll still be able to draw your private pension as you would have done previously.
Having said that, it’s still important to have as much information as possible. You’re strongly advised to speak to your pension provider and find out how they plan to communicate changes with you, to avoid a repeat of the scandal caused by bad Government handling of the WASPI women’s state pension changes. If there is anything else that you can or should do, they will be able to tell you.
Feeling like your retirement plans might be a bit up in the air, because you planned to retire at 55 but now can’t?
The main thing to remember is that, if you plan to retire and start drawing from your private pension before 2028, your plans won’t be affected.
If you plan to retire after 2028, however, you need to rethink your plans. The changes were announced and will be legislated for well in advance (remember, this was first laid out in 2014), so you should still have enough time to consider alternative options, such as investments that might help you to build a larger savings pot separately from your pension.
Remember, a private pension is different to the State Pension. Your State Pension comes from National Insurance contributions (as long as you’ve contributed to National Insurance in your lifetime). The maximum that you’ll be paid is £175.20 per week, not accounting for inflation. This will be on top of any private pension that you save for either independently or through work.
The age at which you can draw your state pension is linked to average life expectancy. It is expected to increase to 67 by 2028, with the next review coming in 2023. As of this October, the age will be 66 for both men and women. You can confirm your state pension age here.
It’s likely that you might start drawing from your private pension pot before you’re entitled to your State Pension. It’s still a good idea to make sure your State Pension is in good shape, though. You should work out whether you’re entitled to a Basic State Pension or a New State Pension. This depends upon your date of birth. You can check via PensionWise or check the State Pension forecast site on Gov.uk.
It’s also important to know that you won’t start receiving your State Pension automatically. In fact, you need to apply for it. Guidance on how to do that can be found here.
Pension freedoms introduced in 2015 allow you to do various things with your private pension pot. Choices depend on your lifestyle and needs.
As PensionBee points out, this could see you cashing in your pot, withdrawing a lump sum, or buying an annuity (a pension product that pays you an income for a certain period, or for life).
Another option is a Lifetime ISA (LISA). You can’t access your LISA until you’re 60. After this age you can access and withdraw a lump sum without impacting your taxable pension income. This could make it more tax efficient than a traditional pension. Ideally, this is only part of your retirement plan because there is a maximum saving limit of £4,000 a year – which won’t give you enough for a full retirement income.
If you want to grow your pension pot ahead of retirement, you could always transfer it to a provider that is likely to offer a higher yield. Alternatively, if you have free equity, why not grow your future earning potential by investing in property, or in other investment safe bets?
There are lots of options for growing your potential retirement income, so make sure you do lots of research to make sure you know what works for you before you decide.
Have you made changes to your retirement plan or to your pension pot as a result of the upcoming changes? If so, we’d love to hear about your experiences.
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