Access to a private pension has been allowed at age 55 for many years. There has long been a convention that it should be no more than ten years before the State Pension becomes available, currently 65.
The State Pension age is set to rise to 66 shortly and then to 67 in 2028. The Government announced last week that private pension access would rise in line with the second change to 57 at the same time. There will be a short period where the gap is set at 11 years. State Pension Age is then due to rise again to 68 between 2037 and 2039, and it looks safe to assume private pension access age will follow to 58.
The changes to State Pension can be mainly attributed to affordability. We now live longer on average, and people are drawing on their State Pensions for larger proportions of their lives. The average 65 years old can now expect to live another 22.8 years compared to 13.5 years in 1948, according to the DWP website. Therefore the Government has to either increase taxes to fund payments or reduce the period they are paid for. There is no State Pension Fund built up during a working life – benefits are funded through current tax receipts.
Private pensions benefit from several large tax breaks. In particular, tax relief on contributions at marginal rates and tax-free growth. In exchange, investors accept the lack of access until retirement and the Government is perhaps reassured that the ‘right’ behaviour (saving to provide a long term income) is incentivised.
The introduction of pension freedom legislation in April 2015 provided savers with the opportunity to gain flexible access to their pensions from age 55. One reason for increasing the age to 57 may be that evidence indicates people are drawing on their pensions in an unsustainable manner post the pension freedom changes in some cases, i.e. too much too soon.
The change to 57 will potentially affect the plans of anyone now 47 or less. For the majority, retiring in their 50s based on pensions alone was always going to be unlikely, even for higher earners because of the impact of the Lifetime and Tapered Allowances. However, there will be some groups where the change will have a significant impact, especially those who had planned to use pension access to pay off a mortgage or those suffering unexpected financial pressures which will no longer be able to deal with the problem by accessing their pensions early.
The change in State Pension Age is going to have a much broader impact on people’s retirement plans. State Pension Age for women was at 60 only ten years ago. Very few people see themselves still working in their late 60s but will be unless they take steps to improve their financial planning today. Good advice will be key.