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The state pension age in the UK has been gradually rising over the years – and it’s expected to happen again in 2028. However, the change will also see the lesser-known ‘normal minimum pension age’ increase too, which could shatter the hopes of those aiming to retire in their mid-50s without facing a bill.
Under the current law, the state pension age will rise from 66 to 67 by 2028, and then 68 between 2044 and 2046. But with the legislation currently under review, the Government could make the change even earlier, with some analysts predicting the rise in the state pension age to 68 as early as 2034.
The ‘normal minimum pension age’, which is the minimum age at which most pension savers can access their private pensions without incurring an unauthorised payments tax charge, is also expected to rise from 55 to 57 in 2028. This could then jump again to 58 following any additional state pension age rises.
While there are some circumstances where people can withdraw the money earlier, this option is generally reserved for those who are suffering from ill health or have a protected pension age.
Those who don’t qualify to withdraw their funds under special circumstances will be hit with a 55 percent income tax bill from HMRC.
According to interactive investor, based on funding a moderate lifestyle, those wanting to retire at the age of 57 would have to find an extra £30,000 to cover the 12 months before they can access their pension if the rules do change.
Those wanting to retire even earlier at the current normal minimum pension age of 55 would have to find a staggering £90,000 to stay afloat.
Alice Guy, personal finance editor at interactive investor, said: “The planned rise in state pension age will leave more people facing poverty in retirement and disproportionately affects carers and those with health problems.
“The changes mean that workers who are currently 57 or younger won’t get their state pension until they reach 68, rather than 67 as planned.”
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And with the possibility that the normal minimum pension age will be set 10 years below the state pension age, it could mean Britons will have to do even more “heavy lifting” to ensure a healthy retirement income, interactive investor’s Myron Jobson has said.
Ms Guy added: “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, Ms Guy said: “You’ll need around £37,300 for a comfortable retirement and £27,200 if you’re part of a couple.
She continued: “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.”
Ms Guy also noted the inflationary pressures could mean Britons will need more than this by the time they retire.
Ms Guy said: “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.”
To build up the additional £30,000 to fund an early retirement at 57, someone aged 46 would have to start investing around £111 a month and achieve an annual return of five percent.
The higher private pension age could also affect workers who are not aiming for early retirement but are instead relying on withdrawing a tax-free lump sum from their pension.
Current rules allow those who reach the age of 55 to take up to 25 percent of the value of their pension without paying any tax.
Ms Guy told the Telegraph: “There is a risk that many people will struggle financially and find it takes longer to clear debts when the pension access age goes up. For example, someone with a £200,000 pension pot might plan to use their tax-free freedom and draw £50,000 to pay off their mortgage at 55.
“But the same person could end up paying thousands in extra mortgage interest if they are not able to access the cash until the age of 58 – assuming a five percent interest rate.”
She added: “There’s a danger that continual tinkering with the system and pushing back when we can dip into our pensions will put people off saving.”
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