Pension age to rise? How you can still retire on your terms

The process of increasing the state pension age to 67 has only just kicked off and now it looks like the next hike won’t be far behind.

The increase to 68 has been scheduled to take place between 2044 and 2046, affecting those born on or after 6 April 1977 (aged 49 now).

But now reports suggest that the Treasury has informed the Office for Budget Responsibility (OBR) that the increase should be brought forward to 2037-2039, less than 10 years after the state pension age settles at 67.

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

The hastening won’t come as a huge surprise within the pension world: independent reviews had already recommended accelerating the 2044 increase forward by seven years, the government at the time just chose not to act on the recommendation.

The current government last year kicked off its third review of the state pension age, spearheaded by Dr Suzy Morrissey, and adjusting the current timetable is one of several possible recommendations.

We should note that even though it now seems widely acknowledged that the government is working on the earlier date, even if it’s not been publicly confirmed, the increase is not official, yet.

The government’s state pension age calculator still works on the basis of a rise starting from 2044, and both Pensions Minister Torsten Bell and the Treasury have rebuffed claims that the 2037 date is rubber stamped. “The law remains to increase the state pension to 68 in 2044,” the Treasury told Sky News.

If the OBR’s proposal is acted on, it will impact an estimated five million people – who are aged between 49 and 55 at the moment – who will need to wait another year before they can claim their state pension.

This will see those individuals who had expected to start claiming their state pension from age 67 miss out on around £12,500 of retirement income (based on today’s rates), assuming they’re entitled to the full amount.

The age you can access private pensions is rising

It’s not just potential changes to the state pension age that stand to shake up your retirement plans.

The age at which you can start accessing your workplace and personal pensions, including self-invested personal pensions (SIPP), is going up as well.

The only exceptions will be those who are in the uniformed public service pensions (like the Armed Forces, police and firefighters) and the lucky few with a so-called protected pension age.

From 6 April 2028, the normal minimum pension age (NMPA) will rise from 55 to 57 (the idea being that it remains roughly 10 years below the state pension age).

• How to make early retirement a possibility
• How much do you need to secure a comfortable retirement?

For anyone born after 5 April 1973, the change means you’ll need to wait an extra two years before you can dip into your private pensions.

However, it’s a bit more confusing if you were born between 6 April 1971 and 5 April 1973. This is because you’ll get the right to access your pension as soon as you turn 55, but will lose it on 6 April because you won’t yet be 57.

People born before 6 April 1971 will have already celebrated their 57th birthday by the time the rules change on 6 April 2028, so won’t be affected.

Why the government wants us working later

The message is clear: we need to work longer before we can access our pensions.

The state pension is becoming increasingly unaffordable, and raising the age we can get it is an obvious and straightforward lever for the government to pull. The OBR has warned not accelerating the state pension age to 68 by 2037 will cost the government £6 billion in today’s terms for each delayed year.

The lower NMPA gives us the flexibility to access our own retirement savings before our entitlement to the state pension kicks in. But in increasing that age, the government is also attempting to protect the sustainability of our own retirement savings too.

Can you beat the changes?

Working longer and delaying taking our private pensions will make sense for many people: our retirements could last 30 years or more.

But for those individuals who have saved and prepared for an early or phased retirement it may mean you need a rethink.

It’s the same for those who need to finish work earlier than anticipated because of their own health problems or the need to care for others.

Earlier this year the Tony Blair Institute proposed a radical overhaul of the state pension that would allow more flexibility – and let people access benefits earlier if necessary.

• Tony Blair Institute’s radical proposal to overhaul state pension
• When will you get your state pension?

But at the moment there’s nothing to suggest the state pension itself will become more flexible.

Yet by keeping an eye on the changes and planning ahead, there’s much savers can do to keep their retirement plans on track.

• Keep saving in stocks and shares ISAs

A healthy stocks & shares individual savings account (ISA) can add flexibility to your finances in the run up to retirement, before you can access your pensions. 

And, even if you can access your pension, turning to your ISA could be more tax effective as all withdrawals will be tax free.

Only 25% of your pension can be taken tax free, the rest is taxed as income. But even if you only plan to take tax-free cash from your pension, there’s still a good argument for delaying if you can. The longer you wait, the larger your pension is likely to be and the more you’ll eventually be able to take.

Each year, you can pay £20,000 into ISAs (so £40,000 between couples).

Withdrawals from ISAs in your mid-50s could be used to fund many of the expenses that people traditionally use tax-free cash for, like holidays, home renovations or paying off the mortgage.

ISA withdrawals can also be a tax-effective way to top up earned or pension income.

• Know the rules if you were born between April 1971 and April 1973

If you’re 55 or 56 in April 2028, you’ll need to give some thought to whether you’ll need any money from your pension before you turn 57. If you do, you’ll need to make your withdrawal before the NMPA increases on 6 April 2028.

• Is an ISA the missing part in your retirement plans?
• How to smoothly transition your investment portfolio into retirement

It’s been confirmed that if you take tax-free cash and move funds into drawdown (once you’re 55) before 6 April 2028, you will be able to carry on taking income from that fund. You won’t lose access to that money once the NMPA goes up, even if you’re not yet 57.

However, you won’t be able to go back and crystallise any more funds from your pension until you reach 57.

This means you need to think about how much you’re likely to need during that period.

But it’s also important to think carefully about taking money out of your pension while you’re still relatively young. Unless you can generate sufficient income from other assets, your pension needs to last for life, and it rarely makes sense to take money out just because you can (especially if it will only sit in a bank account).

• Work on your pension

You might not be able to get back the income you’ll lose as a result of increases to the state pension age, but the better your private pension provision, the less likely you are to be inconvenienced by it.

• Chancellor Healey’s big tax and pension dilemma
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

If you don’t want – or indeed feel able – to remain in work until you’re old enough to claim the state pension, you may be able to flexibly access your private pensions to keep you going in the meantime. Then, when you become eligible for the state pension you can scale back withdrawals.

Increasing monthly contributions and paying bonuses into your pension are both worth considering. But you may also be able to improve your position by reviewing how your pension is invested and thinking about charges. You might also be able to lower your costs by combining multiple pots.

• Rethink work

If you don’t think you’ve got enough saved to retire before you can claim the state pension, it might worth rethinking work during these years to keep some money coming in.

However keen you might be to call it in a day in your current job, you could explore alternatives that let you wind down gradually.

If you’re in a senior corporate role that might include consultancy work, or you could consider less stressful or more rewarding work opportunities. You may also be able to work part-time, which would give you more freedom, without becoming totally reliant on your pension.

Funds from ISAs or pensions could top up your income if necessary.