Why 57 isn’t that far away

Retirement isn’t that far away but do you actually know what your pension age is and when that’ll be?

If like me and many other Financial Independence adherents you keep a close track on your finances and swear by the 25x rule then you’re already comparing your net worth against a 25 year time horizon. Depending on your age, 57 isn’t that far away, so if you are in your late 30s (like me) you have young kids and a mortgage and nursery cost and all that – your 50s can come a knocking quite quickly. But when can you actually access your pensions?

What is the Normal Minimum Pension Age?

Getting definitions right is important. For some “properdee is my pension innit” (except property does a bad job) for others it’s the state pension (from 68 for me) and others have private pensions or final salary pensions. It’s all a bit of a minefield. Luckily the Money Advice Service gives a clear picture. The news recently is that the government is consulting on increasing the normal minimum pension age. This Normal Mimimum Pension Age is the lowest age at which you can access your SIPP and get that 25% tax-free lump sum. In the past, pension freedoms were available at 50, then in 2010 that rose to 55 and the plan is for the age to rise to 57 in 2027. You can read the consultation document here:, it’s only 15 pages and you nee to know it – if you come crying to me like a wounded WASPI don’t expect any sympathy.

You can see in the graph below that in 2027, the NMPA is planned to rise to 57. That’s when I’m in my mid-50s myself, so it’s good to know this for my sake (and maybe yours).

Why is the NMPA this important?

It’s important for a number of reasons. But to put it into perspective, talk to any “early retiree” that you know – maybe a friend of the family of that weird Uncle you have that seems to have fewer greys than everyone else and they’ll probably say that they retired at around 50-55. Behind the scenes, they probably found out that they could access their pension that they’l paid into for year – the markets were kind and fees reasonable and they could take out £200k in a tax free lump sum and live off dividends forever.

A Bridge to Far?

So moving from 55 to 57 affects me and I’ll have another 2 years before I can plunder the pension or a 10% longer wait. In the meantime, I’ve another 20 years to survive on earned income, business income and the existing GFF FIRE assets PLUS save for my retirement. If it moves to 58 (10 years less than the stage pension) or even 60 and it becomes even harder still. So, I have another 20 years of spending and costs ahead (and kids aren’t cheap), the mortgage to pay-off and because of the tax benefits of pensions, I’d like to keep paying into to them too. So moving the normal minimum pension age makes our early retirement even harder.

The bridge from pulling the trigger to getting to Shangri-La of “normal minimum pension age” gets tougher but t hat’s the lay of the land. My advice to you is to start looking at long range forecasting of what spending you have, what your income is now, assets held now, savings/investments and various pension pots. Sounds tough eh? Luckily someone has already done the work for you.

Four Pots

There’s a great post by 7 Circles which can help clarify you’re your approach to pensions pot savings using 4 pots. I love Mark’s blog and he’s probably the best technical personal finance blogger going. Thinking his way, I can see that we’ve got money now (ISAs and what not) that we can spend but also my Defined Benefit pension payable at 60, our SIPPs at 57, state pensions at 68 as well as LISAs at 60. From that I can build up a cash flow profile that looks a bit like this:

GFF’s own position

So potentially our pensions could be worth over £25,000 a year from when we are in our 60s and up to £45,000 by the time we are receiving the state pension. That all seems very good – so long as we can hold out for the next 20 or so years. We’ve got a mix of LISAs, Defined Benefit Pensions, SIPPS and even the State Pension to fall back on.

Tax

In some ways the government’s decision to extend the NMPA to 57 means they will defer tax receipts and lose themselves money. But from a pensioners perspective there is a bit to consider with tax. First of all, at the moment you can take 25% of your pension out tax free meaning if you have a £200,000 pension pot, you can take out£50,000 and pay no tax on it. That’s tempting for someone like me who may have kids in their early twenties who need a house deposit, weddings to be paid for or bail to get out of jail.

Even better is the tax free allowance in the UK. Currently it’s £12,500 a year and assuming you still have your 25% tax free allowance, you can extract £16.667 a year from your pensions and pay no tax or £33k for a couple. That should be enough for people to live off.

Pensions, JISAs, ISAs, LISAs, pay-off the mortgage or save for a deposit?

Knowing all this now means that you can try and work out what’s the best way to organise your finances. There’s benefits to Pensions but in purely cash terms, it’s a short term hit for a long term pay-off. Maxing out your pension (especially if you have salary sacrifice) might sound like a great plan but you might need that money today (or in the next 20 years). ISAs are good – tax-free and accessible but tax is already paid. LISAs are marmite you either love them or hate them (my feelings are well documented). You might want to opt for paying off the mortgage but is that better than paying into your pension or investing in an ISA? And then there’s saving money for your kids – is a JISA the best way to go or evening a Junior SIPP or should your put that money into your pension?

The hard truth is that you need to take the time to understand your own situation and balance what you know against what might happen or change. I’m not able to tell you what to do but if I succeed in getting you thinking about it then I’ve done something right.

Thanks, GFF

14 Comments

  1. Read the document again – if on the date of the consultation you are in a scheme where the rules give you an unqualified right of access at 55 then you could get a new protected right to access that pension at 55. So many of us that assumed it would be delayed until 57 and then later 58 could still get access at 55!

    Like

      1. Read section 2.5 onwards of the consultation document again – it seems the age 55 protection could include members of non-occupational pensions (such as SIPPs) if the current scheme rules say that the member is allowed access at 55. The rules on our SIPPs all say age 55 access.

        Like

  2. I just sneak in before the change to 55. My pension planning is a mix of ISA, BTL rental income and pension (DB) and SIPP. I’ll have reached my full state pension entitlement in a couple of years but like lots of people I’ll be continuing to pay NI for no further benefit.

    I’m structuring my (early) retirement income to try and reduce my tax exposure. The plan is to (hopefully) drawdown 7% from my ISA each year and combine that with my BTL income. Hopefully that will keep me under the taxable threshold and still pay a (pre) retirement income of about £30k per annum before I need to access my pensions.

    I’m 48 and depending on the estimated returns I’m likely to hit LTA before 55. If I cashed out my DB scheme I’d likely hit LTA in 2 years without any further contributions.

    Like

    1. Sounds like you have it all worked out. Assuming mortgage is paid off, £30k a year is more than enough for a good life.
      How do you feel about the BTL income potentially declining as rents stay put but costs go up?

      Like

  3. If the BTL becomes economically nonviable I’d look to dispose of it and then invest the realised funds. If I reduce my pension contributions I’ll be firmly in the 40% tax bracket so the BTL will be much less attractive.

    The property is let out on a 2 year consent to let (residential mortgage) and the consent to let ends in 6 months. I’m currently trying to decide whether to pay off the mortgage, or convert to BTL and invest some of the equity in it. The current tenant is on mates rates and I’m not sure they will be very happy when they have to pay market rates which is a 30% increase.

    Like

      1. I agree but when he shows me the new mountain bike he’s bought and his big TV etc I do wonder.

        Like

  4. Thanks for the post. I had a look at the consultation and my reading of it is the same as Alex’s: if, at the date of your consultation, your current DC provider gives you a right to withdraw at 55, then that right can continue. So, you should be very careful about transferring pensions from now on.
    There are a few caveats here of course; it is just a consultation and govt could decide to have a NMPA of 57 for everyone, or your provider could misinterpret the rules, or the provider could decide to switch to 57 to everyone as it is less complicated. However, as things stand, it looks like I can collect the DC money I have built up at 55.
    This is actually a big bonus for me as I had assumed it would be SPA minus 10, which for me would be 58. I can now access the pension three years earlier than planned! However, I will check and double check with the pension provider after the final rules are out.

    Liked by 1 person

    1. I always assumed NMPA less 10 too until reading this.
      I am 20 years away and who knows what will happen but I don’t expect that I will raid my pension that much at that time anyway but having access and control will be nice

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s