Budget 2021: Sunak announces pension lifetime allowance freeze
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Pension schemes can currently be accessed from the age of 55 but earlier this year HM Treasury confirmed the minimum access age will rise to 57. Additionally, state pensions are paid out from the age of 66 but this too will be rising to 68 over the coming years.
The Government defended the changes by arguing they reflected increases in life expectancy and changing expectations of how long people remain retired.
However, Jon Greer, the head of retirement policy at Quilter, urged the Government to reconsider: “We appreciate the theory behind the change to 57 and the Government’s concerns around people having enough to live off in retirement, however, if you are worried about the longevity of people’s pension pots and people accessing their savings too early, you would not move the normal minimum pension age (NMPA) to 57.
“Looking at the data ,it would appear a large number of people with sub-scale pensions simply cash in their pot at the earliest possible opportunity.
“According to the latest retirement income data from the FCA, 55 percent of pension plans accessed for the first time are withdrawn fully overall, with 75 percent of those withdrawals done by people aged 55-64. Giving them an extra two years of saving isn’t going to change behaviour and will do very little for their prosperity.
“The current Government also made clear it sees the 10-year gap between the NMPA and state pension age as appropriate ‘in principle’, but it does not seem they are overly convinced themselves as it does not intend to link NMPA rises automatically to state pension age increases ‘at this time’.”
The recent consultation also stated individuals with a protected pension age of 55 who wish to transfer could only retain this benefit as a result of a block transfer.
Jon detailed that given the number of people who may have an unqualified right to take benefits at 55 is more than the treasury may have anticipated, and this change may pose some unintended complexity to the DWPs efforts to help consolidate small pots.
Jon continued: “The DWP’s Small Pots Working Group has done some initial good work around the consolidation of small pension pots.
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“However, the proposed NMPA rules effectively remove a benefit should a member wish to transfer to a more appropriate pension scheme and goes completely against the DWP’s work. This risks leaving people stranded in more expensive or inflexible pensions just to safeguard the age benefit.
“The Pensions Minister himself said ‘scheme members should benefit from an efficient, competitive and transparent workplace pensions system.
“This will continue to underpin our approach to consolidation of small pots and member protection, including charges being controlled effectively.’ As such, the NMPA rule change presents challenges that will need to be addressed.
“Given early indications suggest a significant number will qualify for a protected age of 55, perhaps the Government has underestimated the number of people the change to the NMPA is going to capture, and therefore how complex retirement planning will become in future. But essentially, the rules around block transfers complicate things considerably and as such need a rethink if the Government is to proceed with this change.”
In light of this, Jon detailed there are two alternatives the state could consider, either keep the NMPA at 55 or remove proposed transitional protections and move everyone to 57: “”The easiest thing to do is to keep the NMPA at 55 and given the complexities the change introduces, would be the sensible thing for the Government to do. A number of schemes would breathe a sigh of relief here as it will be challenging to implement and communicate to members. It would also prevent the unnecessary further complication of pensions – an industry that already suffers at the hands of difficult to understand rules and legislation.
““If the Government is certain it wants to proceed down the road of increasing the NMPA, then it would arguably be better just to move everyone to 57 and do away with any proposed transitional protections. This will make the change easier to understand and limit the unintended consequences, although thorough communication will be required for those it has the biggest direct impact on.”
Heeding these calls may prove to be especially important following Freetrade’s Great British Financial Literacy Test results.
This test was conducted on over 2,000 people across the nation to find out how knowledgeable UK citizens are about their finances.
The test required participants to answer 18 questions about savings, investment, ISAs and retirements “that everybody will likely encounter at some point in their lives.”
In analysing the results, Freetrade discovered almost half(48 percent) could not answer basic questions about personal finance including what an ISA stands for, the difference between fixed rates and variable rates, and what an annuity provider does when one retires.
Retirement was the area of personal finance that people struggled to understand the most with 80 percent of respondents unable to correctly answer this part of the test. This figure was 81 percent among respondents aged 55 or over.
Dan Lane, a senior analyst at Freetrade, issued a warning following these results: “There should be alarm bells ringing about the fact that 90 percent of Brits lack confidence with their pensions.
“With advances in medical technology and increased life expectancies we’re likely to live longer in retirement than ever before. But a massive gap in our understanding of how to invest for our third age, or even how to access those investments suitably later on, means we really aren’t prepared for a sizable portion of our lives.
“Unless we’re thinking about investing for retirement long before we get there, we could end up in the awful position of regretting the simple financial decisions we made 30 years ago.”
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