The pension age change

The pension age change – ignore it and you could lose out

The minimum retirement age increases from 50 to 55 on 6 April 2010, and I recognise that you will be directly affected by this change.At the moment it’s possible to use your pension to provide a tax-free lump sum and/or an income at any time after you reach the current minimum retirement age of 50. You don’t even need to stop working to do this.

However, if you are over 50, or will be by 5 April 2010 – and you do not access your pension benefits by 6 April 2010 – you will not be able to take out any money from your pension fund until you are 55, up to five years away.

This simple fact could have significant consequences for you, in particular if you needed funds for a specific purpose before your 55th birthday; for example to help a child going off to university, finally taking that dream holiday, or paying off the mortgage.

The good news is that you still have options that let you retain this financial flexibility.

In these tough economic times we understand that you will be looking to keep as many of your options open as possible. You may be concerned about the security of future employment, or are simply seeking alternative income sources (due to the rapidly decreasing interest rates available), but this change in legislation could potentially get in the way of those plans.

You could choose to buy an annuity, a financial product that would provide you with a regular income for life in exchange for a lump sum payment.  If you buy an annuity before the end of this tax year you can avoid being affected by the increase in retirement age. But if you aren’t ready to swap your pension fund for a guaranteed income just yet, there is a more flexible alternative.

An income drawdown plan allows you to take an income from all, or part, of your pension fund while leaving the remaining funds invested. On top of this you can take up to a quarter of the money as a tax-free lump sum. The income can be increased or decreased, within set limits, to suit your requirements. It allows you to retain the right to draw an income from your pension before your 55th birthday without having to commit to an annuity just yet.

If you think you might need a tax-free lump sum or an income from your pension fund before your 55th birthday, taking action now to pre-empt the increasing minimum retirement age could be the solution. However, it is vital that you also consider the impact this will have on your income later in retirement when the possibility of earning is no longer an option.