Pension issue for the sixties generation
Q : I have heard that from next year the pension age will rise, is this correct?
A: I think you are possibly referring to the fact that as from April 6 next year, the age at which people can access their private pension fund is being raised from 50 to 55.
At first glance this piece of legislation seems fairly innocuous, but for a huge number of people this has some far reaching implications.
These changes on a personal and private basis come on the back of the various announcements that have been made and come into force regarding state pension age and the equalisation rights of males and females in occupational pension arrangements.
Take for example two individuals. Ruth was born on April 4, 1960; this means that she can access her pension fund at any point from her 50th birthday onwards.
Philip however was born three days later — April 7, 1960; this means that he has to wait a further five years before he can access his pension fund.
So there is a large band of people who if they are born between 1960 and 1965, may potentially be affected by this change in retirement age.
These people should therefore consider their options carefully before they reach a point where it becomes impossible to draw their pension before age 55.
This will involve reviewing whether or not it is possible to access their pension fund earlier than they had anticipated, and if so, what penalties are imposed if they draw their funds early.
For those with pensions from previous employments or policies that are paid up, this may not be such an issue, but for those who are still in their current employers pension arrangement, the options may not be so varied.
It is possible to draw on a pension fund and still remain in employment, presently there is no legislative reason why you can’t, and many people are looking to this as an option due to the current economic downturn.
People who are struggling financially at present are looking to unlock the values of their pensions to help subsidise current expenditure.
One option is to access the pension fund and simply withdraw the tax free cash entitlement to assist with any capital expenditure or mounting debts.
This can be done without necessarily creating an income stream.
The other alternative is to access the tax free cash entitlement and turn on an income from the fund, to help with everyday expenditure. Many people who have recently been made redundant are considering this as an option.
Careful consideration should be given to this however, as the earlier you access any pension fund, the less likely it will provide you with higher levels of income in later life, and possibly when it is needed most — that is when you fully retire and have no regular salary.
Equally the earlier a pension is taken, the fewer the years it has to grow and so again may have a detrimental impact in the longer term.
So if you do fall into that key band of people born between 1950 and 1955 you should give serious and careful consideration to your overall retirement objectives and possible sources of income in retirement.
These future needs should be weighed up with any current short term needs and an appropriate strategy put in place that will provide you with the maximum flexibility possible.
As ever, you should seek professional assistance both from a financial planning and tax expert to ensure that your strategy is the best and most tax efficient method of planning for your future.
Raymond Mulligan is managing director of Johnston Campbell, a company of independent |financial advisers regulated by the Financial Services Authority. For further information, please contact email@example.com or (028) 9022 1010