New UK pension freedoms: every rose has a thorn
Written by Carl Turner on July 21, 2015.
From 6th April 2015, over 55s in the UK have had access to their pensions and are able to make withdrawals as and when they choose. The Conservative government has marketed this radical shake-up of the pensions system as a triumph of choice for British pension holders. David Cameron himself said "I believe if you've worked hard, if you've saved, if you've put that money aside - it's your money. You should be able to spend it as you choose. We trust people and that is what this change is all about."
But every rose has its thorn, or indeed, thorns. One thing Cameron omitted to mention was how the Treasury will profit from any pension drawdowns, as explained on the Infinity blog. He remained tight lipped about the fact that the retirement age for private as well as state pensions is set to rise significantly over the coming years, so while today’s 55 year olds can access their private pensions, those who are in their early 20s will have to wait until at least age 60, and possibly much later.
The rise of the private pension age was set in motion by the Labour government in 2010 when it went from 50 to 55, a move intended to signal to the population that they should expect to work at least until their mid-50s. The current government policy is to link private pension age to state pension age so as the latter rises, which it is already set to do so will the private pension age with a difference of just five years. This was the clear recommendation of a report produced for the ‘Work & Pensions Committee’, whose Labour chairman, Dame Anne Begg stated "Our view is that, given the significant tax relief provided to pensions, increased longevity and the importance of ensuring people do not underestimate the income needed in retirement, the minimum age at which people can access their pension saving, except on ill health grounds should rise to five years below the state pension age".
That means that those of you who are aged between 36 and 44 will not be able to withdraw anything from your pensions until you reach 58, and if you are between 23 and 35, you will be 59. Anyone younger will have to wait until at least the age of 60. And these are best-case scenarios – those ages could be higher.
The worst-case scenario, presented by the Office for Budget Responsibility, was that anyone who is currently 47 may not reach state pension age until 70 and those who are 42 will have to wait until they 72. Those born in the 90s are looking at working until they are 75. Private pensions for these different age groups would therefore not be accessible until 65, 67 and 70 years of age respectively.
The rise in private pension age comes as no surprise to industry experts who have long been aware that the tax breaks on pensions are so generous that maintaining the current age limits is unsustainable.
The erosion of tax breaks is a trend which has already started with a reduction in the lifetime allowance, a limit on the amount of pension benefit that can be drawn from pension schemes without triggering an extra tax charge (regardless of whether the benefits are drawn in lump sums or as retirement income). This was £1.6m in 2010, is currently £1.25m and will fall to £1m next April. The trend will undoubtedly continue – the only question remains just how fast the age restriction on accessing private pension savings will rise.
Of course, I am not at all suggesting that you don’t invest in a private pension. I consider retirement savings to be a key cornerstone of a sound financial plan and you should make the most of generous tax breaks while they still exist by maximising your company pension or saving into a self-invested personal pension. However, I would advise against planning your finances around being able to access your private pension at the age of 55 and look at diversifying your investments so that you don’t have all your eggs in one basket.