- People born between 6 April 1971 and 5 April 1973 may see their retirement plans impacted by transitional rules set out by HMRC today in its latest pension scheme newsletter
- Under the proposals, people who are aged between 55 and 57 by April 2028 – when the minimum access age rises to 57 – will be unable to enter new drawdown arrangements until their 57th birthday
- Those who have already entered drawdown before this date will be able to continue to access their taxable pension pot
- Anyone caught by the new rules needs to consider how they will plug any income gap created – especially those who have set up a plan to phase in their retirement income
Rachel Vahey, head of public policy at AJ Bell, comments:
“We have known for many years that the minimum age individuals can access their private pension savings is going to increase to age 57 from April 2028. But it has taken five long years for HMRC to finally provide impacted pension savers with crucial details on how this change will affect their retirement planning.
“Individuals born after April 1973 have to wait until they reach 57 to access their pension savings. But this much-anticipated update from HMRC clarifies what the impact will be for those born between April 1971 and April 1973 – particularly those who intend to access their pension in the next few years.
“The good news is that those who will already be taking a retirement income can continue to do so. Stopping a retirement income mid-flow would have been a draconian approach for HMRC to take, and best avoided.
“However, there’s no doubt HMRC has chosen to take a harsh line to setting these transitional rules for this select group of people, offering no wiggle room to reflect the different ways people take retirement income under pension flexibility rules. Of course, in reality many people will not be in a position to access their pension in their mid to late 50s. But it is still effectively lobbing a grenade into the retirement plans of many people who will be aged 55 or 56 in April 2028 and are planning on accessing their pension savings early.
The new transitional rules
“HMRC has today published a newsletter clarifying the rules for when pension savers who are around the normal minimum pension age (NMPA) can take benefits.
“The NMPA will increase from age 55 to age 57 from April 2028. Those who were born before 6 April 1971 can still access their pension benefits once they reach 55, but those born on or after 6 April 1973 will not be able to access their pension savings until they are aged 57.
“HMRC is providing clarity on what the increase in the NMPA means for the group of people caught in the middle – those who were born between 6 April 1971 and 5 April 1973 and will be aged 55 or 56 on 6 April 2028. If they have already moved funds into drawdown then they can take an income from their drawdown funds when they want. Likewise, if they are receiving an annuity or a pension from a defined benefit scheme then this can continue.
“However, they will not be allowed to move any new money into drawdown funds from 6 April 2028, even if they have previously accessed their pension, taken tax-free cash and moved funds into drawdown. They also cannot set up a new annuity or start taking a pension from a defined benefit pension scheme until they reach age 57.
“This will disrupt some pension savers’ pension plans, putting a stop to those taking regular ad-hoc lump sums or in phased drawdown. It will also encourage more people within this group to fully access all their pension funds from an earlier age rather than adopt a more measured phased approach.
Pensions savers forced to pause phased retirement income plans
“Those aged 55 or 56 in April 2028 will not be allowed to take any more tax-free cash or move any money into drawdown, even if they have already accessed their pensions.
“Those who have set up plans to regularly access their pension money – for example by taking a series of ad-hoc lump sums (uncrystallised funds pension lump sums, or UFPLSs) or setting up phased or drip-feed drawdown – will find their plans are scuppered under these new rules. They will be forced to put these phased payments plans on hold in April 2028, unable to pick them back up until they blow out the candles on their 57th birthday cake, pushing many to go back to the drawing board and rethink their income plans.
Dash to fully access pensions?
“Incredibly, these rules could create a perverse incentive for those who are 55 or 56 in April 2028 – in a bid to retain as much flexibility as possible – to access their entire pension savings, and in doing so take their full entitlement to tax-free cash and move the remainder into drawdown.
“Doing so will mean they will have more flexibility to take higher income payments before they reach 57, rather than be restricted to the drawdown funds they moved before April 2028. But worryingly, it also means they could miss out on additional tax-free cash.
“Although individuals can take all their pension pot in one go, if they do not need all the tax-free cash immediately there’s some advantage in only accessing part of the pot. That way they can leave the untouched pension to grow in a tax-free environment, meaning their tax-free amount should also grow.
“For example, Kath has a £100,000 pension pot. If she takes all of her entitlement, she receives £25,000 tax-free cash and the remainder moves into drawdown from where she can take a taxed income when she wants. She cannot take any more tax-free cash from that pension.
“If Kath doesn’t need all the tax-free cash immediately, she could take only £20,000 – £5,000 will be tax-free and £15,000 can move to drawdown. That leaves £80,000 untouched and continuing to grow, meaning her next slice of tax-free cash could be more than £20,000 (25% of £80,000), giving her a higher total tax-free cash amount overall.”
