Thousands of workers will be unable to retire in their mid-50s because of looming changes to pension rules, experts have warned.
The state pension age is due to increase to 67 by 2028, and could rise again to 68 by the mid-2030s under plans being considered by ministers.
But the lesser-known “normal minimum pension age” will also rise from 55 to 57 by 2028, and could then soon after rise to 58 to follow any further state pension age increase.
This is the age at which workers can access money saved into private pension pots without facing hefty tax charges. It is possible to take money out of a pension pot earlier without a 55pc bill, but only in extreme cases of ill health or where someone has less than a year to live.
It means that younger workers could have to wait until they are at least 58 to start drawing on their retirement savings.
If the rules did change, and they still wanted to retire at the age of 57, they would have to find an extra £30,000 to cover the 12 months before they can access their pension, according to broker Interactive Investor. This is based on how much it costs a typical household to fund a moderate lifestyle in retirement. It means those wanting to retire at 55 could have to find close to £90,000 to fund their early retirement.
In order to build up £30,000 of stop-gap cash to cover an early retirement at 57, a 46-year-old would now need to start putting aside about £111 a month. This would have to be invested and achieve an annual return of 5pc to make up the required funds.
Alice Guy, of Interactive Investor, said finding the additional money would make it harder for younger workers to achieve their early retirement dreams.
She said: “Changing your retirement plans isn’t always easy – people set their heart on a certain retirement date and press on with that date in mind.” She added that changing the private pension minimum age to 58 would not give savers long to “adjust their plans or invest on the basis of the new rules”.
A worker targeting a more comfortable lifestyle in retirement would need an extra £48,790 to cover an extra year in retirement, the broker estimated. That would include more luxuries such as three weeks holiday in Europe each year, and replacing the kitchen and bathroom every 10 to 15 years. To reach that figure through investing, they would need to commit about £38,280 over the course of the next 11 years into an Isa – or £290 per month.
Ms Guy added that the higher private pension age could also affect workers who were not aiming for an early retirement, but were relying on their ability to withdraw a tax-free lump sum from their pension. Under current rules, when someone reaches the age of 55 they can take 25pc of the value of their pension without paying any tax.
“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,” she said. “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 5pc 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.”
It comes after large numbers of over-55s took early retirement during the pandemic. This spiked in the summer of 2021, but has since fallen back as the cost of living bites.
The Chancellor wants more of this cohort to return to the workforce to boost the economy.
But many of this group face a tax trap if they go back to work, thanks to yet another quirk of the pensions system.
This is because of the “money purchase” annual allowance. Under these rules, once you have taken money from a pension, the amount you can save tax-free into your nest egg drops from as high as £40,000 to just £4,000 a year. This provides a massive disincentive for retirees to go back to work, as it limits how much they can save.
Tom Selby, of the broker AJ Bell, said: “The Treasury itself admits about 25pc of pension savers aged 55 and over contributed above the allowance in 2020-21. This, combined with the fact many will be forced to turn to their pension in the coming months and years to cover higher living costs, points to a real risk of mass breaches of the savings limit.”
Mr Selby said that the Government should increase the allowance to £10,000, its original level when it was established in 2015, but questioned whether the tax rule was necessary at all.
He added: “Keeping this roadblock to saving for retirement in place isn’t just bad for individuals – it runs counter to stated Government policy,” he said.
A Treasury spokesman said: “The Government is committed to supporting the nation’s savers and has a range of incentives in place to encourage people to invest for their retirement.
“The money purchase allowance affects around 25pc of occupational defined contribution savers aged 55 and over. The cap is designed to stop pensioners from receiving double tax relief by funding ongoing savings with their existing pension pots, which have often accrued without any taxation.”