The UK Centre for Social Justice has proposed increasing the retirement age by 10 years, a move that has been met with outrage from some but understanding from others.
Although there has been no green light from the UK government to implement this yet; if it were to go ahead, how could it impact retirement planning?
“If the government ever took the hugely controversial step of increasing the state pension age suddenly to age 75 it would throw peoples’ retirement plans into turmoil,” Steven Cameron, pensions director at Aegon, told International Adviser.
“Anyone not keen on the prospect of being forced to work to age 75 would need to make far more private or workplace provisions, and advisers would be able to advise on what extra contributions would be needed.”
Financial advice left and right
Helen Morrissey, pension specialist at Royal London, told IA that even though many people would want to work into their seventies, they would need to save around £84,000 ($103,004, €92,753) extra to make up the gap.
“Advisers will need to take a holistic look across their clients’ finances to see what pensions and investments they have in place. For instance, if they have multiple pensions or Isas they could take one at 65 and use the income to bridge the gap.”
David Gibb, an adviser at Quilter Private Client Advisers, also thinks IFAs are going to be key if the pension age is going to be raised, as they will need to ensure that “their clients have flexible sources of income”.
“These will be used to replace what they would have got from the state pension and give them the flexibility to choose their own retirement date, even if the state retirement age is 75.
“As a result, financial advisers will need to adjust their cash flow planning tools to take into account the change to the pension age and update their clients saving strategy.”
To contribute or not to contribute?
But if this sudden shift in the retirement landscape were to happen, would it put people off paying into their pensions?
Peter Bradshaw, director of Selectapension, thinks so.
He told IA: “[It] may well discourage clients from making pension contributions especially if they have limited life expectancy.
“If people are looking to access savings for retirement earlier than [the state pension age] they may well look at other investment vehicles, especially if HM Treasury still wants to push ahead with changes to personal pension retirement ages.”
But not all agree.
Diverging perspectives
Both Gibb and Morrissey believe people will actually save more.
“If anything, these proposals should spur people into contributing to a pension,” Morrissey said.
“If people cannot claim their state pension until they are 75 and they don’t wish to, or are unable to continue working up until that point, then they will need to have sufficient income from other sources to meet their day to day needs and pension savings can help them do that.”
Pension rules woes
There is also a risk that significant change in the retirement age would mean retirees could be more likely to breach pension rules, especially if people go into drawdown, Aegon’s Cameron said.
“Such a huge change would also have big consequences for other pensions rules. For example, it would make even worse the risk that anyone flexibly accessing their pension early would be limited to £4,000 [money purchase annual allowance] on future contributions or be subject to a tax charge.
“Also, the government did originally say that the earliest age to access to pension freedoms would be 10 years below state pension age.
“While this has not been legislated for; if it were, then access to workplace and private pensions might not be allowed before age 65, a further major blow to people’s pension planning.”
Good idea?
Although the increase in the retirement age seems unlikely, would it be a wise move by the government?
Bradshaw added: “[It] would save the exchequer money in the long run but would disadvantage people living in poorer areas as they may never reach [state pension age] based on current regional life expectancy predictions.
“Also, many people may not be able to continue working until their [state pension age] so would need to address the income gap between ceasing work and drawing their state pension.”
