The Government has closed a loophole in its plans to raise the minimum pension age from 55 to 57, to avoid confusion and the risk of fraudsters exploiting savers.
The age when you can start tapping your private retirement savings is due to move to 57 from April 2028.
But 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 and calls for a rethink prompted the Treasury to announce that unless you are currently in the middle of doing a pension transfer, the option of doing this to still benefit from an age 55 threshold was removed as of last night.
Pension planning: The age when you can start tapping your private retirement savings is due to move to 57 from April 2028
The Treasury said it had heard concerns that leaving the ‘window’ to doing this open until 2023 would have an adverse impact on savers and the pensions market.
John Glen, Economic Secretary to the Treasury, said: ‘Some pension savers could find themselves with poorer outcomes (or even be the victim of a pension scam) if they were rushed by rogue advisers to make a quick transfer in the short time period before the window closed.’
The change will apply to most savers, but not members of certain uniformed public service schemes or others who have a specially protected pension age.
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.
>>>How do you bridge the savings gap if you decide to retire at 55 anyway? Find out below
Tom Selby, head of retirement policy at AJ Bell, who recently called the Government plans ‘bonkers’ in an article for This is Money, said today: ‘The Government has made a colossal meal out of increasing the minimum pension access age, culminating in today’s last-minute change to the rules.
‘Whereas under proposals published a few months ago anyone who transferred to a scheme with a ‘protected pension age’ by 5 April 2023 would have been able to retain a lower normal minimum pension age, this will now only apply to transfers initiated before 4 November 2021 (today).’
‘This is good news and should reduce the risk of scammers taking advantage of this Government-induced confusion to defraud savers.
‘It will also mean fewer people make decisions about their retirement pot based purely on the minimum access age when in reality other factors such as costs and charges are usually far more important in delivering long-term value.
‘However, we are left with the ludicrous situation that those people who are today in a scheme with a protected pension age and later transfer might end up in a scheme with two different Normal Minimum Pension Ages. As such, the complexity created by this change will remain.’
Yvonne Braun of the Association of British Insurers, which previously warned the age change plans would cause ‘enormous confusion’, said: ‘We welcome the changes to the implementation of the Normal Minimum Pension Age which tackle some of the industry’s principal concerns about an orderly implementation and help reduce the risks to savers.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
‘The changes stop scammers from exploiting uncertainty, and also prevent market distortions as there are now no incentives to transfer purely to access a pension at age 55.
‘However, 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, partner at LCP, wrote a column for This is Money explaining the age change here.
He said today: ‘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.
‘But if change has to be made then this Government u-turn does at least make things clearer.
‘Money already in a pension which specifically allows access at age 55 should be protected from the change, but any other pension money will only be accessible at 57 once the legislation goes through.’
Steven Cameron, pensions director at Aegon said: ‘We’re pleased that the Treasury has listened to widespread concerns over aspects of its controversial proposals around how to implement an increase in the Normal Minimum Pension Age.
‘This is the earliest age when people can typically access their pension and with a few exceptions, will increase from 55 to 57 from April 2028.
‘The Treasury had proposed transitional arrangements seeking to ‘protect’ a small minority of individuals who are in schemes whose rules by sheer accident of history give an ‘unqualified right’ to take benefits at age 55.
‘The way the protections were previously drafted, someone joining a scheme with such protections before 6 April 2023 would have retained the right to the earlier access age.
‘This could have distorted the market, encouraging individuals to seek out such schemes before the cut-off date even if better value alternatives were available.
‘However, changing to a new normal minimum pension age will still create complexity for members and schemes.
‘If a member in future transfers between schemes, they may find part of their benefits can be taken from say age 55 while other parts won’t be accessible until age 57. This will complicate communications to members as well as record keeping within schemes.’
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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