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Life expectancy in the UK has been rising since the 19th century. A man born in 1841 might only live until 40 years old, yet by 1920 this had increased to 56. In 2019, men could expect to live 80 years and women 83.7 years. Looking ahead, life expectancy is more uncertain. COVID-19 has widened the gender gap (since mortality rates are higher in males), but it has also lowered life expectancy by a rate not seen since World War II.
These figures are clearly important for each of us, since they give an indication of how long we may live. Yet they also bear upon the State Pension age (i.e. the age from which you can start receiving State Pension income) as well as the minimum age from which you can start drawing from personal and workplace pensions. In this article, we draw attention to some announced, upcoming changes to the minimum ages for different UK pensions, why these changes matter and what the implications may be for your retirement plan.
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State Pension age rise
Given that, until recently, people in the UK have been living longer, it is not a surprise that the UK Government is looking to increase the State Pension age. Recently, on 6th October 2020, this was raised from 65, to 66 (for both men and women). This means that more people will work for at least one year longer, generating income that can be taxed. The Government is also mindful that the UK population, as a whole, is getting older and so is looking to ease the strain of the State Pension on the public finances (costing £92bn in 2016-17).
The State Pension age is planned to rise even more to 67 sometime between 2026-28. This is likely to affect those looking to take State Pension income within the next 5-10 years. However, the change also affects younger people. Those wanting to retire early, for instance, might need to build a larger pot of savings (e.g. in an ISA or personal pension) to account for the “lost year” of State Pension income, at age 66. Consider speaking to an independent financial adviser if you believe this could affect you.
Personal and workplace pensions
One of the big changes to UK pension laws came in 2015, when the “pension freedoms” were introduced. The idea behind these reforms was to give people more control over their defined contribution pension savings, where previously they were forced to use these to buy an annuity. Part of the changes included allowing such savings to be accessed from the age of 55 (i.e. the normal minimum pension age, NMPA). However, here another change has been announced – the NMPA is likely to rise to 57, by 6th April 2028.
It’s important to note that this change is not expected to apply universally. For instance, people who are members of various police, firefighter and armed forces public defined contribution schemes are likely to still be able to access their benefits from age 55. However, for those who wish to retire early, this expected age rise is likely to have crucial implications for retirement planning. Depending on your age and when you wish to retire, for instance, this might mean delaying – or bringing forward – your retirement by a few years so you can access your pension. For others, it might require considering alternative saving/investment vehicles outside of your pension(s) to open up more flexibility, in your 50s.
In particular, ISAs (individual savings accounts) can be a tax-efficient way to build wealth that can support your retirement – especially those looking to retire early. In 2021-22, you can put up to £20,000 into your ISA(s) and generate interest, dividends and capital gains without tax. The other benefit is that there is no total limit on how much you can save/invest in an ISA (unlike your pensions, where the Lifetime Allowance restricts your tax-free savings to £1,073,100), and you can access the funds within your ISA(s) from any age. So, one option for would-be early retirees facing the rising NMPA could be to retire at, say, 55 and fund your lifestyle primarily via your ISA(s) and perhaps other investments (e.g. Buy To Let income), until you reach age 57 when you can start accessing your pension pots.
Of course, for those looking to retire in their late 60s regardless, these changes may not affect your plans too much. For example, perhaps you planned to defer taking your State Pension for a year or two (past your State Pension age) so that you could build up your National Insurance record and increase your eventual retirement income. The best way to be sure of your position in light of the announced changes, however, is to speak with a financial adviser to ensure you get the best pension deal in retirement.
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