This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Two key announcements on pensions have been made in the last 4 months. First of all, from October 2020 the UK state pension age was raised from 65 to 66. This was announced in the Pensions Act 2014, of course, so does not come as a surprise – yet it will have significant implications for pension planning going forwards. The state pension age (SPA) will later rise to 68 in 2028; up from 67 in 2026. In short, if you were born between the 6th of March 1961 and the 5th of April 1977, then you will need to wait until age 67 to access your state pension.
The second announcement concerned private pensions. The UK government has stated that, come April 2028, the plan is to raise the age from which these pots can be accessed – from age 55 to age 57 (i.e. which some have dubbed a “cliff edge” approach). Should this change be put in place, then anyone born after the 5th April 1973 will need to wait another two years before they are allowed to access their private pension.
In this article, our financial planning here at Elmfield in Padiham, Burnley, Lancashire offer some thoughts on how the first announcement, in particular, affects retirement planning in 2021 and in the years ahead. We hope you find this content useful. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
Implications of the age rise
Naturally, those originally planning to retire “early” at age 55 with their private pension (after the 2028 change) may need to delay their plans by two years. Alternatively, other sources of income will need to be considered with a financial adviser as a stop-gap if you are committed to the date you first wanted – such as ISAs or property.
However, it isn’t only hopeful early retirees who are affected by the pension announcements. In a similar fashion, those who had long hoped to retire on their state pension at age 66 may need to work an extra year or two. Some example case studies may help to illustrate the implications.
Scenario 1: Roger & Sue
Roger and Sue are in their forties and work full-time in estates and administration at a local college. As lower-income workers, they both intend to rely heavily on their combined income from their state pensions when they retire (about twenty years away). However, they would prefer not to wait until age 68 to both enjoy “life after work” together. They would prefer age 65.
To achieve this, they will need another source of income to support their lifestyle in the three years before their state pensions kick in. Fortunately, with a twenty-plus year horizon in front of them, there is ample time to build up a separate investment portfolio for this purpose – e.g. by setting up a Self-Invested Personal Pension (SIPP) and making regular contributions. To get the best deals and strategy, they decide to seek professional advice.
Scenario 2: John & Mary
John and Mary are in their thirties and both work in professional fields, one as a lawyer and the other as a marketing consultant. They hoped to retire at 55, but will now need to wait another two years if they rely on their private pensions – which were on track to reach their first goal. As such, to “retire” at 55 they will need to consider growing their wealth through other tax-efficient vehicles which allow them to access their money with fewer restrictions.
One strong option here would be a stocks and shares ISA (individual savings account). This will allow John and Mary to both invest up to £20,000 per tax year and generate interest, dividends and capital gains which are free from tax. Fundamentally, they are not restricted from drawing any of the money out until a later date. As such, by building a separate ISA portfolio over the next twenty years or so, John and Mary could use this to fund their early retirement lifestyle for two years until they are allowed to access their private pensions.
The importance of planning ahead
Whilst these two government pension announcements might be unwelcoming to many people, the time window does allow for individuals to set some plans in place in the meantime so that it may still be possible to achieve their financial goals. This assumes, of course, that you start planning ahead of time – the sooner, the better as this allows more time for your investments to grow.
Can you afford to retire when you want to, in the manner you would like? The announcements from last year remind us that the pensions landscape is not static, and so it pays to consult an expert in the field who can help you navigate it with wise choices.
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact ust o arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938