Minimum pension age to rise in April
Thursday, 10 September 2009 05:41
The minimum age at which you can take a private pension is set to rise.
Brian Flindall, pensions expert, looks at what the changes mean to you.
From April 6th 2010, changes are coming to pensions that may be a shock to some. Simply the minimum age for drawing a private pension will rise from 50 to 55.
But you can start planning now to make sure you are not caught out.
Take action
If you were born on April 7th 1960, before the changes you could start drawing your pension on your 50th birthday next year.
But the increase in the minimum age means the earliest you will be able to start to unlock your pension is April 2015 - your 55th birthday.
Everyone hitting the age 55 on or after April 6th 2015 will be affected in the same way, and there is nothing they can do about it.
But if you turn 50 before April 6th 2010, there is still a chance to make plans for your pension.
Someone born on May 18th 1958 could start to release their pension now. But, if they have not taken their pension by April 6th 2010, they will have to wait until May 18th 2013 - when they turn 55.
Few people can afford to retire at 50 - or 55 for that matter - but you can still take some of your pension early.
With a personal pension, there is no need to retire when you start taking the benefits but for members of employer pension schemes, it is worth checking with them first to make sure it will not lead to any problems.
For example, some employers may stop payments into the fund if the pension is taken early.
Take the tax-free lump sum, re-invest, and get more tax relief
If you take your pension early, you access the tax-free lump sum.
Taking the tax-free lump sum early and re-investing it into your pension is very tax efficient.
As you pay no tax on this part of the pension, by taking it and immediately reinvesting it, you can increase the size of your pension pot because you can receive more tax relief.
A basic rate taxpayer would get an extra £2,500 in tax relief on £10,000 reinvested and a higher rate taxpayer twice that amount.
Of course, there is a downside of doing this. Once you have taken the tax-free lump sum once, you cannot do it again. However, you can get another lump sum on the amount reinvested.
HM Revenues & Customs knows about the tax advantages and have complicated rules that prevent tax-free lump sum recycling too much.
Basically, you can't reinvest lump sums over one per cent of the lifetime allowance - which is £17,500 in this tax year - in any 12-month period.
'Phasing in' your pensions?
The changes to the minimum age for drawing your pension also hits those phasing in their pensions - cutting down work and drawing their pension slowly.
Some people give up high-pressure jobs in their 50s, but carry on working in different - more emotionally rewarding - sectors.
Their earnings take a cut but by taking part of their pension, they can continue to manage their budget and the shift from full-time work to retirement.
Those aged between 50 and 55 on 6th April 2010, and phasing in their pension, may have to take action if they want to draw more of their pension.
Problems can arise. For example, if the next planned withdrawal is due in May 2011, this can only be taken if aged 55 or over at this date.
People in this situation can bring forward any withdrawals that they planned to take between 6th April 2010 and their 55 birthday, to 5th April 2010 or earlier, as a way round.
Special rules also apply to some people with protected low pension ages (such as professional sportspeople), so seek professional advice if you are not sure.
Brian Flindall is an Independent Financial Adviser at specialist independent financial advisor Credencis
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