Middle-aged workers could be waiting until 58 to access their pension pot. Alice Guy explains the details and how it could affect you.
We all know that the state pension age is rising soon, but did you know that the minimum private pension age is linked to the state pension? It’s due to rise in lockstep with the state pension age, increasing from 55 to 57 in 2028 and 58 in around 2034. After 2028, the government plans to keep the minimum pension age around 10 years earlier than the state pension age.
The normal minimum pension age (NMPA) restricts when you can withdraw income from your private pension pot. It’s the youngest you’re allowed to withdraw a tax-free lump sum or income from your private pension and, depending on the exact terms, may also affect your workplace pension.
The age changes will severely restrict the options for those wanting an early retirement and will mean those currently 46 and under will probably have to wait another three years before being allowed to draw from their pension pots.
Here, we look at why the minimum pension age could rise to 58 years old by 2034 and what it might mean for you.
Minimum pension age linked to state pension
The minimum pension age was introduced in 2006 to make sure people saved longer for retirement. A 2021 government consultation explained that the NMPA is meant to ensure, “a balance between the generous tax relief that the government provides to enable people to save for retirement, and setting the right incentives for them to accumulate sufficient pension savings and not fall back on state support in retirement”.
Encouraging people to work for longer means older workers will carry on contributing to the economy and paying taxes for longer before they start drawing on a pension income. It also means that they’re arguably less likely to run out of money in old age and become reliant on the state for extra support.
Private pension age rising to 58
We already know that the minimum private pension age is due to rise from 55 to 57 in 2028.
A few weeks ago, government sources revealed that the government plans to increase the state pension age to 68 years old earlier than planned, possibly by 2034. This means the private minimum pension age is also likely to rise to around 58 years old, 10 years before the state pension age, in 2034.
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The rule change will mean that workers who are currently aged around 46 and younger have to wait an extra year before being able to draw a tax-free lump sum or income from their pension pot.
It’s important to keep an eye on government announcements as the exact date and details of the next state pension age rise are due to be revealed in the spring - it could end up being slightly earlier or later than 2034. Watch this space for more information on the announcement with details on what it will mean for you.
What will happen in 2028?
On 6 April 2028, the minimum pension age is rising from 55 to 57. Here are some things to know about the changes:
- The increase won’t apply to members of the uniformed services pension schemes, such as firefighters, police and members of the armed forces
- Some pension schemes will be able to protect pension benefits for existing members so they can still take their pension between age 55 and 57
- Workers changing jobs will need to be careful as switching pension scheme may impact on their minimum pension age
- Pension schemes can choose how to carry out the increase in minimum pension age as long as changes come in by 6 April 2028.
- From 2028 onwards, the government aims to make the minimum pension age for private pensions 10 years below state pension age, although it won’t be automatically linked.
How the changing private pension age could affect you
The increasing private pension age will impact millions of private pension savers, not just those who want to retire early. Here are three ways it could affect you:
1) Tax-free lump sum
Many of us are planning to use our tax-free lump sum to pay off our mortgage, help out the kids, or cover other essential costs. Not having access to that money until we turn 57 or 58 could impact our plans or mean we need to save more elsewhere. For example, if you had a £200,000 pension pot at 55 and planned to withdraw £50,000 to pay off your mortgage, you could end up paying around £7,000 more interest over the three years between 55 to 58, assuming a 5% interest rate.
If you planned to use your lump sum to help your kids or to pay for a once-in-a-lifetime holiday, you’ll either need to delay your plans, or save into another savings vehicle such as an ISA, to give you more flexibility.
2) Needing to save more for an early retirement
If you do still want to retire early, then it’s important to do your sums and plan ahead. The PLSA Retirement Living Standards estimate that a single person needs around £23,300 per year for a moderate retirement and £17,000 if they’re part of a couple. In contrast, you’ll need around £37,300 for a comfortable retirement and £27,200 if you’re part of a couple.
But those figures are net of tax, meaning you could need more if that income is coming from a taxable source, such as a pension or part-time job. The figures also don’t include housing costs and assume you live outside London, so you’ll need more if you’re still paying off your mortgage or you rent your home.
But don’t forget inflation, which means you’ll actually need more than the above figures by the time you retire. If you’re 46 or under and still plan to retire at 57 on a moderate income, then you’ll need to save an extra £30,477 by 2034 outside your pension to tide you over until you’re 58 and can access your pension, assuming you’re single and have paid off your mortgage.
On the plus side, it could mean that your pension income lasts for a little bit longer, as you’ll have drawn from your pot for a shorter period.
3) Added pressure if you’re retiring early due to circumstances
Of course, taking early retirement isn’t always a choice, and many workers have to cut their hours or hang up their boots due to ill health or family circumstances.
Retiring due to ill-health means you might not have enough time to save up for a comfortable retirement. If this is the case for you, or someone you know, then it’s worth taking a look at the website called entitled to, to see if there are benefits available you could be claiming.
If you’re struggling with debt or need support claiming disability benefits, then it’s important to get help. Charities such as Stepchange give free debt advice, while Citizens Advice can help navigate the complex world of claiming benefits.
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