Increase in pension age could delay your retirement
Last month saw two major changes to pensions legislation in the UK.
The first was an increase in the State Pension Age (SPA), which was increased from age 65 to 66. This change may not be a surprise as it has been on the horizon for some time, with The Pensions Act 2014 providing the framework - for which the State Pension Age is reviewed at least every 5 years.
Based on the government’s current projected timescales, the latest changes mean that anyone born between 6 October 1954 and 5 April 1960 will have to wait until their 66th birthday before they are able to claim their State Pensions. And this is forecasted to increase from age 67 to 68 between 2026 and 2028, which currently means that anyone born between 6 March 1961 and 5 April 1977 will have to wait until they are age 67 before they can access their State Pensions.
Despite these timetables seeming rather specific, it is worth pointing out that they may be subject to change, and you should check out the State Pension Calculator to find out when you can start to claim your State Pension.
The second piece of big news is the intended changes to the age at which individuals can access their private pensions from their employers. The changes mean that the age for which you can access your private pensions is likely to increase from 55 to 57. Unlike the State Pension Age changes, the government has announced that the changes to private pensions will not come into force until 2028, however it is currently unclear how these changes will be implemented.
Assuming that the government implements a ‘cliff-edge’ strategy where the age increases from 55 to 57 from 6 April 2028, that would mean that anyone born after 5 April 1973, will have to wait an extra two years before they can access their pension pots.
The changes to the age at which the State Pension and private pensions can be accessed is rather complex. However, fundamentally they simply mean that individuals will have to wait longer to access their pensions, meaning that there are some very important financial considerations to bear in mind.
What considerations do you now need to make?
Certainly, the increase to the private pension age may leave many questioning if they have to push back their retirement plans to at least 57, but there is not really a simple answer as it really does depend on your current circumstances and how your financial affairs are structured. Nevertheless, this is a very important consideration for many people. To bring the point to life.
Let’s look at an example
Mr & Mrs Johnson are currently both age 45 and they each intend to retire in 10 years’ time. They have accumulated a number of private pensions throughout their careers, as well as regularly making savings to both their current cash accounts and investment portfolios.
Based on their age and the proposed changes they will not be able to draw pension benefits until age 57, which is 2 years longer than what they had intended as they both wanted to retire and draw benefits at age 55.
They were not previously aware of the changes to pension legislation, but upon hearing the news, they now believe that they will have to work for longer than they had wanted.
The situation facing Mr & Mrs Johnson is not ideal. However, with careful financial planning, there are a number of steps that the couple can take to ensure that they meet their goal of being able to enjoy an early retirement.
The first could be ensuring that they have an appropriate savings strategy in place meaning that they will have enough money available for when they wish to retire at age 55. That might mean increasing their savings contributions now, adding a lump sum to one of their bank accounts, cutting down on some of their current spending, or a culmination of all three.
A second avenue to explore is ensuring that the couple’s investments are working as hard as possible so that they are in a position to be able to draw upon their investments, rather than their pensions, to supplement their income needs at age 55.
That might mean that the couple increase their contributions to their investments, but perhaps more importantly, ensuring that their investments are appropriately invested so that they have the best chance to grow enough to be able to meet their needs in the future when they do need to access the money.
It’s equally important to ensure that their pensions can deliver on their aspirations, so ensuring that they are invested appropriately is imperative as they won’t be able to access their private pensions as early and will also have to wait longer before they receive their State Pension.
Also, ensuring that they can access their pension benefits in the most flexible way may be vitally important, as it not only allows them to adapt to any unforeseen circumstances that might arise during retirement, but it may also help them maximise their income by saving money on any tax that they may have to pay.
There are many avenues that Mr & Mrs Johnson can explore to help them achieve their goal of an early retirement, however, they may now be unsure which path is best to follow.
It’s all about the planning, now and in the future
At The Private Office we use a tool called cash flow forecast planning, which brings an individual’s financial plan to life – for both now and in the future.
This shows our clients a visual picture of their current and future financial position. We input key financial information including your income, expenditure and your assets, to assess your future financial position and whether you can deliver on your goals and aspirations.
Our clients increasingly find that cash flow planning allows them to answer their most burning questions, such as “When can I afford to retire?” and “How much can I spend in retirement?”.
Overall, the recent changes to pension legislation have the potential to change your financial future, however with careful financial planning, achieving your life goals may be a lot easier than you think.
If you’re concerned about changes in the pension age or you’d simple like to learn more about what your future financial plan may look like, why not get in touch. We’re currently offering anyone with £100,000 or more in savings, pensions or investments the opportunity for your own personal FREE cash flow forecasting plan worth up to £500.
Please note: The value of your investments can fall as well as rise. You may not get back what you invest. The Financial Conduct Authority (FCA) do not regulate cash flow planning.