How would a higher minimum pension age change retirement planning?

The government is currently consulting on raising the age whereby people can access their pensions, increasing it from 55 to 57 years old. Jon Yarker talks to a handful of financial advisers about how such a change could alter retirement planning...

In its consultation, the Treasury said raising the minimum pension age to 57 could “encourage individuals to save longer for their retirement” and help ensure people have financial security in later life.

The two year increase would be made to reflect changes in longevity and expectations around how long people can be expected to continue working. On a day-to-day basis for advisers, could this impact retirement planning?

In his career, Lyndhurst Financial Management financial adviser James Wyman has often found clients will access their pension at the first instance to unlock tax-free cash and pay down their mortgage and other debts. As a result, he sees both advantages and disadvantages to raising the minimum access age.

“Pushing it later means you are likely to have more funds during retirement or seek advice before drawing down on the pension, but it will also force people to retire later especially those who will look to use their pension to top up income as they ease their way into retirement by reducing working hours over a number of years,” said Wyman.

“This will also lead many to build pots outside of their pensions which they can access earlier, whilst not age-restricted there will be little to no tax relief available to the contributions into investments, unlike a pension. Choosing the right investment vehicle to be as tax efficient as possible will be paramount.”

Dominic Thomas, principal at Solomon’s Financial Planning, recognises the logic in the government reacting to longer life expectancies but is critical of the overall state interference this represents on retirement planning. For example, he points to the existing restrictions on pension contributions and the “infantile” £4,000 MPAA.

“It’s all silly,” said Thomas. “There is no context and little allowance for our self-determination and acting like adults. There are hundreds of scenarios where access to a pension might be very sensible or indeed the only option for someone who is financially struggling… think of those in their mid-50s who may be facing a harsh employment period.

“It is far too much to expect any politician of any persuasion to apply some basic criteria to encourage us all to make provisions for our future, instead they seem hell-bent on depriving us of the opportunity to do so. Expecting sensible reform of pension rules seems very naïve. So, making access later… sure why not, it’s all part of the absurdity of a tax and pension system that is anything but simple.”

‘Rules change after you’ve invested’

“There seems little merit in extending the age limit for access to pensions, particularly in the current climate when many might have planned an early retirement due to an inability to find work during the pandemic,” added Hayley North, Chartered financial planner at Rose and North. “Few people access pensions at such a young age anyway and the flexibility to do so means that many people can provide much better for their own retirement.”

Philip Wise, Chartered financial planner at Informed Choice Independent Financial Planning, does not envisage any change in the law impacting clients’ decisions around retiring. Though this will impact their ability to rely on pensions for the initial few years of their retirement.

Instead, like Thomas, he is critical of the message this sends that the government can change the rules around retirement at will.

“It reinforces the view that the government can change the pension rules and that the rules for your pension can change after you have invested,” said Wise. “Imagine that you had planned for a retirement at 55 and put all of your money into pensions to fund that retirement. Now, the rules have changed, and you must find some other way to finance your first couple of years of retirement.

“If I was 30, and I wanted to retire at 60, I would probably be well advised to make sure that I put money into something alongside pensions, as by the time I get to 60, the minimum pension age might be 65.”

This emphasis on tax wrapper diversification is shared by Carl Roberts, Chartered financial planner and managing director at RTS Financial Planning, who is himself not enamoured with frequent changes by the government.

“I for one are not too keen on the idea of governments telling you when you can access your money, and I definitely don’t like it when they make changes after you have already paid in,” said Roberts. “But the government are doing this because of increased life expectancy. As we are now living longer, these changes will mean working for longer which in turn will hopefully ensure our pension savings last longer.

“Having said that, pensions remain a fantastic way to save for your retirement because of the tax relief they give, and the extra top ups you get from your employer. I would definitely not [advocate] putting ‘all your eggs in one basket’. That way if the government do change the rules in the future you have a backup option.”

Further changes could indeed be in store for the minimum pension access age, and Wyman expects this could be an indication the government is aligning this with the access age of Lifetime ISAs (currently 60).

“Pension tax relief is a huge cost to the government so removing it in the future looks more likely although it probably won’t be an overnight change,” he added. “Though this looks to me to be the first move towards it.”