Two years until pension freedom age rises – and what to do about it

It’s time for fellow millennials to start thinking about building an ISA bridge to beat the rising age of pension freedoms, editor Edmund Greaves writes.

The age at which savers can access their pensions is rising in April 2028 – from 55 to 57.

This has been in place for some time, but it is little reported on and I’d argue very much not something most people will be aware of.

The age at which you can access your pension is directly linked to the state pension age (SPA). The logic of this is to keep a 10-year gap between the two in order to keep the whole system stable and sustainable.

Pension freedom age (PFA) gives us access to those hard-earned funds first, then your retirement is further bolstered by the valuable state pension later on.

The debate about the state pension and its long-term affordability is slowly increasing in volume. But as things stand there is no one political party committed to a solution – driven largely by the gerontocratic dynamics of the electorate.

It is easy to discuss proposals such as abolishing the triple lock, means testing the state pension or other measures which might make the system more affordable. But the reality is that the most likely tweak is going to be an ever-increasing SPA.

This is because it is politically easier to achieve. Those impacted will have to wait years before they notice and they also tend not to vote in sufficient numbers to make a difference.

Pension freedom age

With that assumption in mind, this is where the 10-year link between the SPA and PFA becomes really important.

We already know that the SPA is rising to 67 from 2028 – and with it PFA is rising to 57 at the same time.

So what if we then assume that the SPA is reviewed in the future and further increases are legislated for – to 70, 71, 72 or even higher. This quick fix has a real-world effect on our own retirement planning.

It means that the age at which we will be able to access our personal pensions will also steadily increase too. This means two things:

1. We will have to work for longer into our later years to pay for our day-to-day lives.

2. We assume more risk in later life that if something happens (i.e. illness, death of a partner) then we won’t have access to valuable savings pots to cope with the situation.

The good news is there is a proactive way to deal with both of these things. I shall deal with them in reverse.

Income protection

Getting sick later in life is unfortunately not a non-zero chance – no matter how invincible we feel in our 20s and 30s. Stuff happens.

My own mother battled cancer throughout her 50s. She lost that battle at age 59. Hers is just one story among thousands who have to deal with such personal tragedies every day.

It is all too easy to put off this worry, but it is real. This is why life insurance, income protection and other insurance policies exist. 

A recent report from LV= found people were more likely to insure their pets than their own incomes or lives. It is a staggering blind spot in many people’s long-term financial plans. But it is easily remedied.

The ISA Bridge

The second point is more nuanced but potentially no less powerful – you need to start building an ISA bridge.

Think of your pension as a steam train. When you start your career, the steam train leaves the station and chugs along at a good pace.

What the increase in the PFA does is it pushes the end destination further away, increasing the risk that the train might come to a stop, be plagued by signalling issues or even derail completely.

The answer to this is to build yourself an ISA Bridge to get over the gap.

The reason we contribute to a pension is the valuable pension tax reliefs on offer, plus the combination of our own and our employer’s contributions to the pot. It is seamless because it comes straight out of your pay packet.

This is the benefit of the pension over an investment ISA (it has to be investments because cash will never grow your money enough over long time horizons).

The ISA bridge method is how you build a contingent side pot that has no age-based risks. You can access it at any time, should you need it.

The tax benefits are not as handsome up front, and this is why the pension is still number one in terms of contributions, but the simplicity and the tax perks of an ISA on exit are not to be ignored either.

Using a combination of cash savings (for rainy days), pension (the steam train to retirement town) and the ISA bridge (the early exit tool) is a must if you want to give yourself more freedom, flexibility and potentially – security once you start to think about the day you call time on your career.

If you want to get a deeper conversation on this topic, Chris Tuite and I discussed the ISA bridge in the latest edition of the Mouthy Money podcast. You can find the full episode below.