If you are planning early retirement or taking a significant lump sum from your private pension pot at the earliest opportunity, it’s vitally important you understand the impending minimum pension age increase, and the effect it could have on your retirement plans. This Moneyfarm blog will walk you through all you need to know.
Historical context of minimum pension age changes
When we talk about the minimum pension age increasing to 58, we are talking about private pensions, and the age at which you can first access your pension pot and take advantage of withdrawing money tax free.
Today, there is no mandatory retirement age. You can retire when you feel you can afford to, but State Pension age is a separate discussion.
State Pension Age History
The State Pension does have a mandatory age at which you can begin receiving payments, and that too has changed over the years. State Pension age increase history looks like this:
- 1908 – The State Pension was introduced. State pension age was 70.
- 1925 – State Pension age was reduced to 65.
- 1940 – A different State Pension age was introduced for women. It was 60.
- 1948 – The mandatory retirement age for men (65) was introduced.
- 1995 – State Pension age for men and women equalised at 65. Finalised by 2010.
- 2011 – Announcement that State Pension Age 67 would be brought forward to April 2026 to April 2028 rather than April 2034 to April 2036, rising to 68 between 2044 and 2046.
For accurate information regarding your personal State Pension age, use the State Pension age check tool.
At the time of writing, it has been announced that the proposed dates for the pension age increase from 67 to 68 years of age will be subject to independent review sometime after the next general election.
Reasons behind increasing the minimum pension age in the UK
In 1909, when the State Pension was first introduced, average life expectancy in the UK was 52. 135 years later, it has risen to 81.92 years according to the Macrotrends website. It‘s why experts now consider that the UK is approaching an ageing population crisis which the current model of the State Pension will be unable to support. According to the International Longevity Centre (ILC), the State Pension age needs to rise to 70 or 71 to maintain the status quo.
Another way of highlighting the problem of the affordability of the State Pension is to look at the relationship between State Pension age and GDP. In 2021/2022 the cost of the State Pension was 4.8% of GDP. It’s predicted to rise to:
- 4.9% by 2031
- 5.5% by 2041
- 6.2% by 2051
- 7.3% by 2061
- 8.1% by 2071
These figures are courtesy of The Office for Budget Responsibility.
It is clear to see why the ongoing need for a minimum pension age increase policy is so important. Primary ways of mitigating this would be either slower rises in State Pension, or watering down or abandoning the triple lock.
Comparison of pension age policies in different countries
The problem of an increasing ageing population is not just a concern in the UK. It means that each country’s age at which citizens start receiving the state pension is under the microscope.
According to Yahoo News in March 2023, the UK shares its current pension age with Portugal and Spain. The State Pension age in France is considerably lower at 62, but French president Emmanuel Macron has announced plans to increase retirement age from its current 62 to 64 by 2030.
Countries that have already increased their State pension ages to 67 include Denmark, Greece, Iceland, Italy, and Norway.
The impact of pension age increase on retirement planning
The UK government’s pension age increase plans will have a significant effect on your retirement planning; especially if you are planning to retire early and you’ve done some cashflow projections to ensure your financial position remains tenable until you reach State Pension age. Any increase in this age means that your private pension savings will have to last longer.
But it’s not just the minimum pension age increase in terms of the State Pension you need to consider; there is also the planned private pension age increase to consider, too.
The private pension freedoms that came into force in April 2015, mean you can access your private pension pot at age 55, sparking in many the dream of actually retiring at 55. It’s currently the age at which you can take 25% from your pension pot tax-free. But it’s due to change to 57 from 6 April 2028, in less than 4 years’ time, and again to 58 in 10 years’ time (if not before).
For most people, and for those who can afford it, this will be the new earliest age at which they can retire.
The financial implications of delayed retirement
Delaying your retirement, if your health and wealth allows, will have a significant, positive effect on your retirement funds. In terms of the UK State Pension, you can defer when you start to receive payments. The planned minimum pension age increase to 67 years of age won’t impact deferring your State Pension from today, if you’ve already reached State Pension age. Deferred payments will benefit by an increase by the equivalent of 1% for every 9 weeks which works out to just under 5.8% for every 52 weeks.
Another benefit in terms of State Pension age increase is that if you are behind with your National Insurance contributions, you will have another year to catch up.
Bearing in mind that pension income is taxable (after the initial 25% you can withdraw tax-free from private pensions), planning your retirement income carefully, and deferring your State Pension (and your workplace pension) if you continue to work, could keep you in a lower tax bracket.
As far as private pensions are concerned, deferring when you start taking funds will also benefit you because the longer you leave your funds where they are, the more time compound interest will have to do its work, and the more your pension pot will grow. In this respect, increasing the age at which you can first access your pension pot to 57 and eventually 58, should act in your favour.
Consider Pension Transfer
It’s important to make sure that the money invested in your private pensions is working hard for you, even more so with the raising of the private pension fund access age to 57/58. If you believe your funds would be better off in another pension scheme, like the Moneyfarm pension for example, we would be happy to organise a free pension transfer.
Increasing Pension Pot Access Age to 58 – Advantages and Disadvantages
The combination of the minimum pension age increase State Pension-wise, plus the minimum pension age increasing to 58 circa 2034 (or earlier) for accessing private pensions, will no doubt shatter the dreams of those hoping to retire earlier. But at the same time, it also presents an opportunity for you to review your pension situation and take appropriate action.
Pensions are a complex subject. It can be difficult to understand the full workings and ramifications. There is also the fact that if you carry out your own research, there is the risk of pension scams, which must be avoided at all costs. Your best solution if you wish to seek professional independent advice is to talk to a Financial Conduct Authority (FCA) approved financial advisor like Moneyfarm.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
