Closing down sale as minimum retirement age changes!

Published on 19th November 2009

From April 2010 the minimum age that you are allowed to draw benefits from a pension will rise from 50 to 55. There's a need for urgent action on the part of Contractors hoping to release tax free cash from their funds ahead of the rule changes. In addition women relying on the state pension to fund their retirement will also now have to wait until they are 65 and worryingly, only a quarter of the UK workforce is aware of the changes according to a recent study*.

Those approaching 50 and planning to draw pension benefits could be in for a shock next year. From April 2010 the age at which you are allowed to withdraw cash from a pension will increase to 55 which could effectively prevent millions from retiring or accessing much needed funds. The rules are changing as a result of Government concerns over the ageing population as the Authorities desperately try to compensate for the twin challenges of a lack of state pension provision and shrinking workforce by encouraging a longer working life.

Greater pension freedoms were introduced in 2006 which allow you to release tax free cash yet carry on working and even continue funding fresh pension contributions with all the inherent tax benefits to Contractors that this represents. Many of our clients have increasingly looked on previous pension benefits as a useful nest egg that could be dipped into when the need arose. These pension funds can be accessed for any reason you choose and we have had clients fund holiday homes, repay expensive mortgage debt or simply build a financial buffer against the backdrop of an uncertain employment market.

Double whammy

The rise in the age at which women can claim their state pension to 65 years only serves to underline the need for personal provision in the future. Women have often had a raw deal from pension provision given the greater chance that they will not qualify for full benefits due to career breaks etc. The message is loud and clear that men and women we can no longer rely on the state to fund your retirement, not least in the freelancing community because many Contractors will hope to hang up their mouse mat and retire long before you reach the official retirement age. It is therefore vital to ensure that your time as a Contractor is spent wisely and you use this opportunity to build a sufficient nest egg to prevent you from waiting for the state pension to become available.

So what can Contractors do?

Unfortunately, the new rules on taking an income from your pension will prevent many Contractors from retiring as early as planned. The good news is that you can still eventually release that all important tax free lump sum when you reach the new minimum retirement ages but anyone of the pivotal age 49-54 needs to properly assess their short to medium term needs now and we will be happy to help in these discussions.

Since pension's simplification was introduced in 2006, you can invest virtually all of your contract (although if you earn over 150k per year then new restrictions mean that you only earn higher rate tax relief a max £30k invested and then tax relief will be calculated on a sliding scale of between 40-20% according to your contributions) but gone are the days when you would be forced to buy a rigid annuity.

Increasingly our clients opt for income drawdown where the funds remain invested after tax free cash has been released. This allows you to continue to participate in what many are predicting will be healthy returns from equity based investments in the years to come. The key, as always, is a properly constructed basket of assets so that you can benefit from growth across many different fields as and when it occurs.

In a post MSC, IR35 and income sharing world it could be argued that pension investment represents one of the few remaining areas of tax planning actually encouraged by the authorities. It's not just Ltd company set-ups, which typically operate outside IR35, who can benefit. Contractors who use a PAYE umbrella company may also be able to take advantage of a salary sacrifice arrangement to reduce their tax bill.

* research conducted by Aon Consulting

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