The tax efficiencies that come with making pension contributions can undoubtedly encourage saving for retirement. And with the normal minimum pension age rising from 55 to 57 in five years’ time, it looks like many of us will be saving and working for longer.
Although the NMPA is already increasing, it was suggested earlier this year by the Resolution Foundation that policymakers should consider raising it further. A 10-year gap between the normal minimum and state pension ages supports early retirement, the think tank’s report read.
As many in the workforce adjust to the reality of longer working lives, early retirees have also come within the government’s purview, with chancellor Jeremy Hunt abolishing the lifetime allowance in the spring Budget, as opposed to increasing it.
“It’s a pension tax reform that will… incentivise our most experienced and productive workers to stay in work for longer,” he said.
A rich retirement could still be a less early one
Tax reliefs encourage us to stuff our pension pots, and the lack of LTA will no longer curb this.
To use an example of someone earning £50,270 who receives a £5,000 pay rise, pushing them into the higher rate tax band, they could choose to keep the extra £3,000 as take home pay, or make a pension contribution that effectively costs them the same amount to receive a grossed up contribution of £5,000.
Assuming there is not a more immediate need for the extra £3,000, the gross contribution is certainly appealing.
But what government policy and think tank proposals around pension ages highlight is that when you can hang up your hat is not necessarily about how much is in your pension pot.
An extreme example, however likely or unlikely, would be somebody whose private pension pot exceeds £1mn before they reach their NMPA, but who does not have the means to retire before they are allowed to access their healthy retirement savings.
Diversifying beyond private pensions
Over-relying on the state pension is obviously not ideal; the full new state pension is currently £185.15 per week. But maybe relying too much on private pensions for retirement income is also becoming a risky strategy.
Although reflecting an increase in life expectancy and to help ensure financial security in retirement, the change to the NMPA in 2028 will not be the first time it has increased.
Saving outside of a pension may not be as tax efficient, but with pensions subject to income tax when you come to take the money, the choice can be either to pay tax today or later down the line.
The benefits of adopting a holistic approach to retirement planning are becoming clearer. ‘Holistic’ can sometimes come across as a fluffy term, but its definition, that is, dealing with the whole of something and not just a part (according to Cambridge Dictionary), seems very apt here.
That is, having assets that are accessible when pension pots are out of reach may enable us to maintain a greater degree of autonomy over when we can retire.
On the other hand, putting all our pension eggs in one basket can put our retirement date in the hands of government policy. And with Labour having said it would reverse the changes to tax-free pension allowances, it is clear that pension policies can be subject to change.
