If you are one of the two million people celebrating your 55th birthday over the next couple of years then beware – there’s a most peculiar quirk in pension rules that you must get your head around.
Turning 55 is the milestone age when you are finally allowed to start dipping into your private pensions, which includes any workplace schemes you’ve saved into or any money you’ve set aside independently.
But that age is going to rise abruptly, jumping overnight to 57 in just over two years’ time, in April 2028, to keep in line with the state pension age, which is gradually increasing from 66 to 67.
This jump will create a strange anomaly that will start affecting people as early as next month.
Anyone who turns 55 from April 6 this year onwards will have to grapple new ‘hokey cokey’ rules where their access to their pensions could be switched on and off again until their 57th birthday.
In simple terms, they will have a small window to access their pension after their 55th birthday, but then may be blocked from withdrawing any money for as long as two years.
Confused? It’s a fiendishly complicated quirk that the Government has yet to fix. Pension experts are decrying the confusion it will cause and the potential it has to disrupt many people’s carefully laid financial plans.
Anyone who turns 55 from April 6 this year onwards will have to grapple with new ‘hokey cokey’ rules where pension access could be switched on and off again until their 57th birthday
Why are the rules changing?
Currently, anyone can start to draw money out of their pensions at the age of 55. This is a popular pensions rule, known as the ‘normal minimum pension age’, that gives savers the freedom to access their money if they want to retire early, for example.
This rule was created when the state pension age was 65. And as a rule of thumb, the Government tries to keep a ten-year gap between the age you can access private pensions and the state pension age.
However, when the state pension age rose to 66 in 2020, the minimum pension age was left at 55. Former pensions minister Steve Webb, now a partner at pension consultant LCP, explains: ‘It was decided that changing it to 56 in 2020, when the state pension age hit 66, and then again to 57 when the state pension age hits 67, would be too complex, so they held it at 55 until April 2028.’
The state pension will begin its rise from 66 to 67 in April this year. The increase will unfold slowly over the next two years.
A month will be added on to the state pension age each month from April 2026 onwards until April 2028, when everyone will reach the state pension age at 67.
So there will be periods when the state pension age is 66 years and between one and 11 months.
However, unlike the state pension age rules, the minimum age for accessing private pensions will go up from 55 to 57 overnight on April 6, 2028.
What will change and who will the bizarre quirk affect?
By no means everyone starts tapping into their pension on their 55th birthday, and in fact money experts say it’s better to wait if you can, to give your retirement fund longer to grow.
However, it can be a financial godsend to those who plan to retire early, have a big ticket item they have set their heart on, or decide to get shot of their mortgage as soon as possible.
Imagine, then, that you get access to your pensions, only to have that right swiped away again, and be barred from withdrawing any more money for some period lasting up to two years.
An estimated 1.9million people will reach 55 between April 6 this year and April 5, 2028 – meaning those born between April 6, 1971 and April 5, 1973 – and are in the group potentially affected.
Under the rules as they stand, from the stroke of midnight between April 5 and 6, 2028, someone aged 55 or 56 who has been making pension withdrawals will have to wait until their 57th birthday to regain access to their money.
For those turning 55 next month, the impact will be minor. There will only be a couple of days or weeks for them to wait until they reach 57. But others who turn 55 closer to the deadline will have to hang on for much longer. Some will only get a fleeting chance to get their hands on their pension at 55.
Here are examples of how it could work in practice. Someone turning 55 in May this year will be able to access their pension immediately and keep doing so until the minimum pension age increases in April 2028, at which point they will be 56 and 11 months old. They will have to wait one month until their birthday that May to regain access.
Mr Webb gives another example: ‘Suppose, for example, that you were born on April 5, 1973. In this case you will reach age 55 on April 5, 2028 and can therefore immediately access your pensions on your 55th birthday,’ he says.
‘However, if you miss that day – perhaps because you are busy celebrating your birthday – you will wake up the next day to find that you now cannot touch your pensions until you are 57, which is two years away.’
When you first access your pension, you have several options. You can choose to take your 25 per cent tax-free lump sum and leave the rest invested. You can take the whole lot – either in cash or to buy an annuity. Or you can make withdrawals in chunks or take your pension as a regular income, where 25 per cent is tax-free and the remaining 75 per cent is taxed.
It is still unclear how the rule changes will apply in these different scenarios. For example, if you are under 57 and have already started taking your pension as a regular income, will you be able to carry on doing so after April 6, 2028? Or, if you have asked your pension provider for your tax-free lump sum but have not yet received it by that date, do you still have the right to it or will you have to wait until you turn 57?
Confused? It’s a fiendishly complicated quirk that the Government has yet to fix
Will this confusing age rule be fixed?
A way to prevent savers falling foul of these ‘hokey cokey’ pension access rules is being sought by tax officials, but there are no details yet.
An HMRC spokesman said: ‘Further details on transitional rules for the rise in the Normal Minimum Pension Age (NMPA) will be provided before April 6, 2028.
‘Schemes will confirm how their rules and member protections apply for those under 57, and savers can contact their scheme to understand any impact once the regulations are published.’
HMRC adds that the future regulations will be designed to ensure people who have already become entitled to, and started to take money from, their pension payments can continue to receive those benefits after April 2028 – even if they are not yet 57.
However, it is still unclear how people who were entitled to take money from their pension but didn’t before the rule change will be treated.
Former pensions minister Steve Webb explains how the quirk works
If HMRC decides to let only those who have already tapped their pension to continue doing so, it could risk people making withdrawals when they don’t need to just to prevent their right to access their pension being taken away.
That means there’s still significant uncertainty for people who are aged 55 or 56 on April 6, 2028, says AJ Bell’s head of public policy, Rachel Vahey.
‘This lack of clarity is causing confusion and making it difficult for this group to plan for their retirement. HMRC now needs to prioritise passing clear, updated regulations so people can make informed decisions about their pensions savings with confidence.
‘There has been plenty of time to get this sorted, so this delay is very frustrating,’ she adds.
‘While HMRC might argue that the rules on pension access don’t change for another two years, people turning 55 between now and then will have questions about how this impacts them. They need this clarification now.’
There is a relatively simple fix available to the Government, according to Gary Smith, financial planning senior partner at Evelyn Partners.
It can just let people who turn 55 in the run-up to April 2028 keep the right to access their pensions, whether they have previously touched them or not. It’s going to ‘cause a lot of complexity and confusion’ if that doesn’t happen, he warns.
What happens if you get it wrong?
If you make withdrawals from your pension before the permitted minimum age, you would normally face a hefty tax charge.
Rachel Vahey, of AJ Bell, wants HMRC to be clearer about pension access rules
Penalties on early withdrawals are up to 55pc depending on how much money you take. It is unclear whether HMRC will waive them under these circumstances.
You should therefore operate under the assumption that they will be imposed. Reputable pension firms should check your age and stop you in time, but there’s no guarantee they will.
Many people will not have private pensions, or do but do not want to access them early, while others will have pensions with ‘age 55’ written into their terms and conditions.
In the latter case, savers can dodge the problem and still get their money from then on if they want – we explain how to check this below, and why it’s best to avoid transferring your pension in this scenario.
What to do if you are affected
The first thing to do is check the terms and conditions on your pensions to find out the ‘protected retirement age’, says Smith. This is the age at which you can access your money, regardless of the minimum pension age rule.
Some will state 55, and some older ones even say 50, rather than the normal minimum pension age.
Most of Smith’s customers with lower protected ages avoid moving these pensions to another provider, to retain the flexibility of making early withdrawals if they want to pay off a mortgage, for example.
You should check each individual pension plan you hold, including where you might hold more than one plan within an employer’s scheme, if you have worked at the same place for a long time.
Smith says if you intend to retire at 55 or will want cash around then, you should build up your Isas in addition to your pension to bridge you over. You will miss out on pension tax relief, but there is no age limit on tapping into Isas.
Another option, if you and your partner are different ages, is to put more money in whichever pension you can draw on sooner, he suggests.
If you are turning 55 in the next few years and are therefore affected, Smith says you should plan to make withdrawals so you have enough to tide you over just in case the Government doesn’t fix the problem, and you lose access for a while after April 2028.
Rachel Vahey of AJ Bell says if you might be affected, you mustn’t do anything without careful planning.
‘Unless you’d planned to access your pension at age 55 or 56 this won’t make any difference to you. If you are planning to access your pension and have concerns about the increase to age 57 causing some disruption, try to resist the temptation to second-guess what the Government may do.’
She adds that the worst thing you can do is panic and tap into your pension for no good reason, because although some may choose to take their tax-free cash, withdrawing income from a pension in your mid-50s may not be the best move.
‘Most people will continue working and building up their pension into their 60s. It’s worth talking to a financial adviser if you’re thinking of taking pension income full stop, and certainly if you plan do so in your 50s.’
