Planning to retire early? The minimum pension age is set to rise from 2028

A little while ago we wrote a blog about how to retire early in the UK, where we highlighted how 55 is the earliest age at which you are allowed to access your pension. The government has since confirmed that, from 2028, this threshold will to rise to age 57, seemingly to keep the 10-year parallel in place between the minimum pension age and the State Pension age (which is set to rise to 67 in the same year).

The upshot is that, if you are currently aged 47 or under and planning on an early retirement, you may need to wait a further two years before you can access your retirement funds.

But does this mean having to wait a further two years to give up work?

Not necessarily. As financial advisers, we often recommend that clients consider a range of investment vehicles for building up a retirement fund.

There are obvious ones like Individual Savings Accounts (ISAs) and General Investment Accounts (GIAs), but lesser-known options like Offshore Bonds and even Trusts (if doubling up with an inheritance tax planning need) can form part of your overall retirement income planning strategy.

Another possibility is that, if you have a very large amount of capital to invest (for example due to the sale of a business) your accountant may recommend you set up a Family Investment Company. This can then be used to invest for long-term growth and ultimately generate a regular income for you and your family.

Why pensions are sometimes best left until last

If you do have a range of savings and investment strategies beyond a pension, we often recommend leaving pension benefits until later. This is because:

• Pensions are taxable at your marginal rate of income tax after you’ve used your 25% tax-free cash entitlement, so by drawing on tax-free sources of income first (e.g. ISAs), you can allow your pension to grow for longer before paying tax on it;

• Accessing a personal pension triggers the Money Purchase Annual Allowance (MPAA), which limits all future contributions into a pension to £4,000 per year – bad news for those who were thinking of easing into retirement with part-time work, and continuing to use the tax benefits of saving into a pension;

• Pension assets are considered to be outside of your estate for inheritance tax purposes, so by initially drawing on capital that may be liable for inheritance tax, you can potentially preserve more of your overall wealth for the ones you love.

Of course, there are circumstances where it does make sense to tap into your pension sooner rather than later – for example if you are at risk of breaching the Lifetime Allowance for pension benefits.

The best course of action for you will depend on your circumstances, so we recommend speaking to an adviser to get a more tailored answer.

Do I need to do anything?

Maybe – the fact remains that this change isn’t guaranteed to happen. No laws have come into effect as of yet, and the government still has to iron out the details. It nonetheless makes sense to plan as if the change will happen, as it’s something the government has been talking about since 2014.

If you are aged 47 or under, aiming to retire at 55 and your retirement savings are concentrated largely or wholly in pensions, now is the time to consider your options:

• How much income are you likely to need in retirement?

• Can you start building an alternative savings pot now to tide you over for those extra two years?

• Have you made the most of your £20,000 annual ISA allowance?

• Do you need to rethink how you will repay your mortgage, if the plan was to use tax-free cash to settle the remaining debt at 55?

You may not immediately have the answers to these questions, but it’s a good idea to start thinking about them now so you’re not caught unawares further down the line.

If you’d like to work through these questions with a financial adviser (and any other implications you may not have thought about), we’d be happy to arrange an appointment for you – just get in touch.