Tick tock.... 55,56,57
The government has been accused of ‘shifting the goalposts’ on pensions by confirming plans to change the minimum age for accessing a private pension from 55 to 57 in 2028.
Carried widely on news websites, some of the reactions left me with mixed feelings. On the one hand, it is good that pensions are in the public eye and important that such rule changes are widely understood so people have time to prepare.
On the other hand, I don’t remember much controversy when the normal minimum pension age was last changed back in 2010, a more dramatic shift from age 50 to 55.
I suspect the difference is that in those days very few people accessed private pension cash early, instead leaving it closer to their actual retirement from work to start taking benefits. Now, many people start as soon as they can.
The Financial Lives research by the Financial Conduct Authority found that 55% of those who had accessed pensions in the previous two years had done so when they were aged 55, with only 40% saying they had left it to later. The other 5% said they didn’t know.
One of the obvious effects of pension ‘freedom and choice’ has been to massively publicise the fact people can take defined contribution pension money – all of it, if they wish – from their 55th birthdays. Anyone who doesn’t know, receives a letter telling them the money is sitting waiting for them to ring and ask for it.
Generally, I think that giving people access to their pensions before they actually retire is reasonable, but I am yet to see good evidence that those taking big chunks of pensions cash early are those who can afford it.
The point of the age limit, of course, is to limit freedom in a bid to remind people that there is life beyond work which will need paying for. Life expectancy is not something that seems front of mind to many people approaching the end of their working lives. The most likely age of death for a 65-year-old with a pension is now around 91, compared to 78 back in the early Seventies.
Recent research by the Office for National Statistics revealed that 60% of those aged 55-64 – the age group making key pension decisions – had not thought about how many years of retirement they may need to fund, which is perhaps the most fundamental question when planning for later life.
To be fair to the government, the age change is not ‘moving the goalposts’ as it was first announced back in 2014. Its statement this week said that people need to prepare for longer lives which in many cases will mean working later and using pension money for later life rather than current consumption.
Apart from more flexibility to access pension cash, the other main plank of pension ‘freedom’ was the free, impartial and independent guidance set up in acknowledgement that people would need more support making informed decisions in a more complex environment.
The Financial Conduct Authority is looking at how to increase take-up of guidance from its currently low levels. It is vital that the regulator gets this key level of consumer protection right to help guard against people making poor decisions and falling for scams.
We believe this will need a shift from the current ‘opt in’ system to an ‘active opt out’ where people receive the guidance as part of the process unless they make a conscious decision that it is not for them.
An ‘opt out’ has proved such a popular success when automatically enrolling employees into saving into a workplace pensions that it makes sense to extend it to guidance when they start to cash in, whatever age they are.