Which 50-somethings must wait longer for their pension?

The age at which people can access their private retirement savings is going up - it’s 55 now but will rise to 57 from April 2028.

This is the Normal Minimum Pension Age (NMPA). It is the point at which people can normally get access to the money they have saved in pensions - a very important point in most financial plans.

Waiting longer to access this money may seem frustrating, but it’s part of a wider trend and not without reason. We are, generally speaking, living longer and spending many more years in retirement than in the past, and our retirement savings have to pay for those extra years. The same reasoning lies behind increases in the State Pension age.

The rise in NMPA from 55 to 57 sounds simple enough but implementing it means some transitional arrangements have had to be put in place, and the draft rules governing this have now been released. They may be significant for those affected and may require thought and planning to navigate.

Here’s what you need to know.

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Who doesn’t need to worry about this?

For people born before, or after, certain dates, the situation is clear:

• Those born before 6 April 1971 have NMPA of 55;
• Those born after 5 April 1973 have NMPA of 57.

These people can base their plans on being able to access the pension at these dates.

Born between those dates?

It is the cohort born between 6 April 1971 and 5 April 1973 that will be potentially affected by rules governing the rise in NMPA. (There are exceptions where pension schemes have a protected lower retirement age - see below).

These are people who will already be 55 or 56 on 6 April 2028, when the rise in NMPA to 57 arrives. They will have been able to access their pension before that date because the NMPA was 55, but will not yet be 57 when the higher limit takes effect.

To deal with that, the rules say these people can have continued access to pension money ‘crystallised’ by 6 April 2028, but they will not be able to crystallise any more of their pension until they reach age 57.

What does that mean in practice? To understand that requires a brief explanation of what happens when you access money held in a pension.

To access pension money via drawdown or an annuity it must be ‘crystallised’. Crystallising pension money is not the same as withdrawing it from the pension. Crystallised money can stay within the tax-efficient pension wrapper - Income Tax only becomes due when it is withdrawn, or annuity income is paid. A proportion of any money crystallised can be withdrawn free of Income Tax - 25% of it, up to a limit of £268,275.

• Read: The best (and worst) ways to take your tax-free cash

A third way to access pension money is via an ‘Uncrystallised Funds Pension Lump Sum’ (UFPLS). This means an amount of money in a pension is both crystallised and withdrawn at the same time. In these instances, 25% of an UFPLS withdrawal is available tax-free (subject to the limit above), and the rest potentially faces Income Tax. Each UFPLS withdrawal is a new crystallisation.

Considerations for those affected

If you are in the affected age group, any pension money you wish to withdraw between 6 April 2028 and your 57th birthday must be crystallised before the higher NMPA comes in.

If you are in this group and have not accessed your pension, you will need to decide before 6 April 2028 whether you want to access it before your 57th birthday. If you do, you must crystallise what you’ll need before the higher NMPA arrives.

There is a particular challenge for those accessing pension money via UFPLS. As each UFPLS withdrawal is a new crystallisation, new withdrawals like this won’t be allowed until you reach age 57, so consider if you’ll need to crystalise more before 6 April 2028 to meet your needs.

Anyone seeking to manage this transition should, however, avoid crystalising too much of their pension needlessly. That’s because the tax-free element of your pension is worked out based on the amounts you have crystallised - 25% of the amount crystallised is potentially tax-free. As such, it can work in your favour to leave money uncrystallised if it then increases in value through investment growth, meaning a higher amount of tax-free cash could be available in the future.

• Looking for personalised financial advice? Our advisory service can help you plan for your next step

Protected retirement ages

Since it was first introduced, the NMPA has changed over time. It was originally set at age 50 in 2006, before rising to 55 in 2010. The rise to 57 comes next.

As such, different forms of protected retirement age have been introduced allow individuals who are members of pension schemes to access their pension savings earlier than the current NMPA, subject to certain conditions.

You will need to check with each of your pension schemes to see if they have protected retirement ages that will apply in your case, and how they plan to administer them in the case of your pension. Bear in mind that protected retirement ages are specific to schemes, rather than to you as an individual, so different scheme may offer differ arrangements.

The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Our retirement specialists can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

Got a burning question you want to ask? Why not drop us a line. Click here to ask your question.

• Read: 3 reasons why retirement is cheaper than you think
• Read: 5 reasons why moving pensions into a SIPP can make sense
• Read: My income is from multiple places - can I pay into a pension?

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.