Darren McAinsh, Technical Manager, says that, with good financial planning, clients can still retire when they really want to:
The recent Budget announced a series of pension reforms designed to increase pension flexibility and encourage savings. But, against this, the State Pension Age (SPA) has been steadily increasing and is likely to continue to increase.
Those wanting to have control over the age they retire at need to take action. And the sooner that action is taken, the less it will cost.
By using a Personal Pension or similar arrangement, control can be kept – and it needn’t cost the earth. Previously, to provide a pension income of £10,000 per annum, a fund of perhaps twenty times that amount was required.
Under the new proposals, however, it becomes possible to withdraw funds with no upper limit. The money withdrawn would be subject to income tax at the marginal rate on any excess over permitted tax-free cash.
The fund must be large enough to provide an income at least equal to the state pension for the term between when the pension can be accessed (55 years) and the SPA (taken as 67 years). The figures below are based on the assumption of a 12-year gap – and, if this is reduced to 10-years as proposed, it would mean the cost will be less than described.
The current guaranteed minimum pension for a single person is £148.35 per week. Over 12 years this gives £109,082 of total payments, allowing with 2.5% escalation, the minimum under the ‘triple lock’ guarantee. It’s important that the guaranteed escalation is taken into account, as otherwise the total payments would only be £92,570 – a difference of £16,512.
For a 30-year old, this gives a term of 25 years until the pension can be accessed. Taking level contributions gives a gross annual premium of £2,561. For a higher rate taxpayer, this is a net outlay of £1,537 per year and £38,412 over the 25 year term based on 5% net growth per annum. That’s £128 per month in ‘early retirement premiums’.
That cost is in exchange for having access to £109,082 – equivalent to the minimum pension guarantee for 12 years.
Is this value for money? That depends on how valuable it is to have flexibility to retire early, and whether there is another option to turn the same outlay into a better benefit.
For those with either a long term or else the disposable income to fund over a shorter term, there remain options to take retirement at an age that is felt to be best for the client.
The consultation is not final – there could be changes following the industry response – so the specifics may need to change. Fundamentally however the process will remain the same: it is client needs and financial planning that will prove critical, not arbitrary income limits.
