Pensions retirement age shock (09/2009)

From April 6th 2010 - that's just over 6 months away - you will not be able to draw upon your private pension until you're 55. Currently, the rules allow you to take the benefits from age 50. Yet only 31% of 45-54 year-olds surveyed recently by Aon Consulting were aware of this change.[1]

So if you're over 50 but under 55 by next April, you should certainly read on. But if you don't reach 50 by next April, you'll now have to wait until you're 55 to take any pensions money.

Why consider drawing my pension early anyway?

It may be unlikely that you can afford to give up work at age 50 - or even at 55 for that matter. So why might it make sense to draw on your pension before you retire? Here are a few examples:

1. Pensions phasing - many people take the opportunity to "phase" in their pensions whilst continuing to work, allowing them to reduce their working hours or to choose less pressurised work. Phasing means that part of the pension benefits are withdrawn to provide income, with the remaining fund continuing to be invested.
2. Access the tax-free lump sum - Since the Pensions Act 2006, up to 25% of the capital value of all pension funds can be made available as a pension commencement lump sum, free of tax. These monies can be used as you wish. Some use the lump sums to secure an income (e.g. via a Purchased Life Annuity) while others may have specific objective for the lump sum such as debt or mortgage repayment. However, we strongly recommend that anyone considering such a plan takes professional advice. A pension is designed to provide income in retirement and should not be seen as an easy way to raise cash.
3. Reinvest the tax-free lump sum - even if the lump-sum benefit isn't needed for a specific expense or to secure income, it can make sense to take it, re-invest it into a pension and get more tax relief. A basic rate taxpayer reinvesting a £10,000 lump sum would get £12,500 into their pension and a high rate taxpayer £15,000. HMRC is aware of the tax advantages of this process and have rules restricting this "recycling". However, as John Lawson of Standard Life puts it[2]

"don't reinvest lump sums of more than 1% of the lifetime allowance (equal to £17,500 in this tax year) in any 12-month period, and there will be nothing to worry about."

One other point is that pension commencement lump sums (tax-free cash) may only be taken once from a pension contract. But re-investing the money into another pension will produce a new lump sum entitlement.

What if I already have a phased retirement plan?

If you have already adopted a phased retirement plan but will be under 55 in April 2010, check with your adviser that your vesting plan can continue. You may need to make interim arrangements to ensure your plan will still work as expected.

Employers and Normal Minimum Pension Age

From an employer perspective, several matters should be considered:

1. Alert 49-54 year-old scheme members to the forthcoming change and offer access to suitable pensions advisers.
2. Check the pension scheme rules and amend if necessary. For example, contract-based pension schemes (GPPs, group stakeholder pensions and group SIPPs) allow members to take their benefits under the scheme, and then rejoin the scheme. In other words, employees need not stop contributing to the pension scheme. And there is no statutory requirement for employer contributions to cease either.
3. Members of occupational schemes may have the right to draw a pension after age 50. These members can keep that right so long as it was contractually present before 10th December 2003 and the pension is fully vested when the right is honoured and employment terminates before the pension is vested.
   

And finally....

Unless you're a professional sportsperson (who can have protected pension ages as low as 35 for certain pre-2006 pension schemes!), this minimum pension age change is an overnight change, not a gradual shift towards 55. And if you're in the 49-54 age group, there's still time to act.

Derek Miles
Managing Director, Aspira Corporate Solutions LLP, September 2009

[1] "UK Workforce Unaware of Pension Age Changes" by Aon Consulting and reported by The Pensions Advisory Service, 13 August 2009

[2] "The Cutting Edge" by John Lawson; Standard Life's Pensions News bulletin, 28 July 2009