From April 2010, it will not be possible to retire between 50 and 55 – whether voluntarily or not – and take an immediate pension because the minimum age at which this can be taken in the absence of ill-health changes at a stroke from 50 to 55.
This has, of course, been anticipated for some years but even so it is unwelcome and unnecessary, particularly at a time when the jobs market is becoming ever more flexible. It was done at the same time as the move towards higher state pension ages which was primarily intended to equalise the state pension age of men and women in a gradual stepped process over several years, not as in the case of private pensions (by which I include public sector pensions) as a one-off increase of five years.
One has to ask whatever was the point of this unless to move the public’s perception for all pensions to a greater age – the “we’ve all got to work longer” approach driven by the alarming increase in longevity and the consequent strain on both the public and private purses. But pension arrangements – be it for private or public sector workers – are in a different position to the state scheme, which covers everyone.
The critical difference is that there is a discretion in occupational schemes whether to allow early retirement which is mirrored in the flexibility the legislation accords to personal pensions, except that there the discretion is with the planholder rather than the trustees.
But it amounts to the same thing – from 50 you can start taking your pension. Why should the state be concerned whether that discretion is exercised at 50 or 55? The cost is the scheme’s, not the state’s, although I suppose with personal pensions and money-purchase occupational schemes there may be a concern that the fund will be depleted too quickly if taken too early, with the consequent increased possibility that the member may have to fall back on state benefits. But in reality how often does this happen?
The majority of such pensions are in any case set up as annuities which are dependent as much on gilt yields at the time as the annuitant’s age. Income drawdown tends to be for larger funds and is heavily dependent on investment performance whenever the member takes benefits.
The recipient will pay tax on the pension so what in reality is the detrimental effect of taking benefits at 50 other than to the individual who is deprived of what could be a much needed benefit.
It could cause significant problems – loss of flexibility inevitably does, particularly in the present economic circumstances in which it makes even less sense than it did at the time it was proposed. Redundancy under 55, which is becoming increasingly common, will be more painful because an immediate pension is no longer possible.
It cannot be a part of the redundancy package which is strange when we are all being told we have to accept the need for greater flexibility in our working lives, including short time working, sabbaticals with reduced pay and long-term pay freezes as well, of course, as outright unemployment with limited prospects, particularly for people over 50, of finding alternative employment, certainly at anything like one’s previous salary so a less well paid job has to be accepted to make up the expenditure shortfall – witness the number of older shelf stackers at the supermarkets.
Without access to immediate pension, their financial position will inevitably be more difficult. There are admittedly some highly-paid people who have been able to use the current minimum pension age as a way of taking early retirement on very attractive terms but they are very much in the minority.
What is needed is more flexibility, not less, so the change to 55 is a retrograde step and should be abandoned. On the assumption that it will not be, should you consider doing anything before the end of this tax year if you are over 50 but under 55? Well, particularly if you have a personal pension, you could consider taking your pension lump sum now and defer taking the pension itself until you actually need to.
Once you have crystallized your benefits by taking the lump sum, you can take the pension at any time after April 2010, even though you are not yet 55, up to the age of 75.
Other than that, your options are limited. There is currently a general acceptance that there should be a minimum age at which funds that have had the advantage of significant tax benefits can be available for use. US-style section 401K schemes where members can access tax-advantaged funds in certain circumstances before they take pension is now being talked about as a possible way forward in the UK which makes the impending change to 55 even less appropriate – but the age of 50 has been accepted as a reasonable one for many years so its increase to 55 now makes no real sense.
David Baker, Legal director, Wealthtime