Minimum pension age on the up!Thu Sep 23 00:00:00 GST 2021
This article has not been updated yet to reflect the changes proposed by the Pensions (No. 2) Bill 2021-22.
This article is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It’s based on our understanding of government guidance and announcements made at the date of publication.
With people tending to live longer and spending a larger proportion of their life in retirement than in the past, it’s no surprise that there are increases planned to both the State Pension age and the minimum pension age for private pensions in the coming years. It’s worth knowing what these changes are to help with such things as pension scheme administration and communications, retirement planning and the ongoing review of income requirements during retirement. This article looks at the change to the minimum pension age for private pensions. A separate article looks at the State Pension age changes.
Minimum pension age for private pensions
This can be read in conjunction with the flowchart titled ‘Change to NMPA from age 55 to 57 from 6 April 2028 and protected pension ages (PPA)'.
The current normal minimum pension age (NMPA) for taking benefits from a private pension is age 55. This is to increase to 57 in 2028 and HM Treasury issued a consultation document on 11 February 2021 setting out how the transition might happen. This was followed by a consultation response and draft legislation that were both issued on 20 July 2021. While some aspects remain unclear, our understanding based on the consultation response and draft legislation is as follows:
The key changes
- The change to the NMPA of 57 will take effect on 6 April 2028.
- The increase to age 57 will not apply to members of the various firefighters, police and armed forces public service pension schemes (commonly referred to as uniformed services pension schemes).
- The government intends to introduce a protection regime to apply to all types of UK registered pension scheme (occupational and non-occupational schemes) that will allow benefits to be taken before age 57 (but not earlier than age 55) after 5 April 2028 where a protected pension age is held.
- Essentially, the protection regime will work by allowing anyone who is a member of a pension scheme by 5 April 2023 that had an ‘unqualified right’ in the scheme rules at 11 February 2021 to take benefits from their arrangement at an age below 57, to be able to take benefits at that younger age even after 6 April 2028. If protection does apply, this right will apply to all money paid into the arrangement. Note – 11 February 2021 was the date the initial consultation document was published.
- There will be no need for individuals or schemes to apply to HM Revenue & Customs to benefit from the new protected pension age option.
- Care will need to be taken when individuals are looking at moving jobs, moving pension schemes, making a transfer or taking benefits to understand the impact this could have on the NMPA that will apply.
- Schemes will be given the right to choose how to implement the increase in NMPA to 57 as long as it is achieved by 6 April 2028. They may implement the change before then if they want to do so, providing they notify members of the increase in NMPA when it is practical to do so and consider the relevant disclosure of information requirements.
- From 2028 onwards, the government’s intention is that the minimum pension age for private pensions should be ten years below State Pension age, although they are not automatically linking NMPA increases to State Pension age increases at this time.
Definition of unqualified right
An ‘unqualified right’ is one that doesn’t require the consent of anyone else such as a member’s employer or the scheme trustees. There is a definition of what is meant by an unqualified right to take benefits in the Pensions Tax Manual that relates to the existing protected pension age rules. In their consultation response issued in July 2021, the government stopped short of providing further guidance on what could constitute an unqualified right but have said they may do so in due course (this is likely to be in the Pensions Tax Manual). They did, however, include the following two examples:
- Where scheme rules expressly state that benefits can be drawn from age 55, the government considers that this would amount to an unqualified right.
- Where scheme rules refer to the NMPA or its underlying legislation (for example, permitting benefits to be taken from the lowest age consistent with the Finance Act 2004 regime) this would not amount to an unqualified right.
Interpretation of the term ‘unqualified right’ will therefore be key to determining whether a protected pension age will be available in a particular scheme and there remains some uncertainty here.
In some circumstances, it will be possible for someone to protect a right to take benefits before age 57 in their current scheme on transfer to a new scheme. This will be possible for block and individual transfers if the relevant conditions are met and the receiving scheme offers protection.
For block transfers, at least two members must be transferring all their rights from the same transferring scheme to the same receiving scheme at the same time for the right to take benefits earlier than age 57 to be retained. So, a partial transfer would not qualify as a block transfer. Unlike the existing protected pension age rules, there is no condition that the person transferring cannot have been a member of the receiving scheme for more than 12 months.
Subject to the receiving scheme offering protection and based on the draft legislation, it appears that a protected pension age attached to a block transfer would also apply to any existing rights and future contributions in the receiving scheme. This conflicts with the consultation response, which suggests that the protected pension age should only apply to the transferred funds meaning they would need to be ring-fenced in the receiving scheme (unless the receiving scheme already benefits from the same protected pension age).
For individual transfers (or bulk transfers where the block transfer conditions are not met), it will be possible to transfer funds from one scheme to another and for an existing protected pension age to be carried across on transfer subject to the receiving scheme offering protection. Unlike the block transfer option, it’s not necessary that all the funds in the transferring scheme are transferred out. So, it could be possible for a partial transfer to be made and for a protected pension age to be carried across into the receiving scheme.
Based on the draft legislation, it appears that a protected pension age attached to an individual transfer will only apply to the transferred funds (if the receiving scheme offers protection) and not to any existing funds in the receiving scheme or to future contributions. This means the transferred funds would need to be ring-fenced in the receiving scheme (unless the receiving scheme already benefits from the same protected pension age). It also means there are discrepancies in the treatment of block and individual transfers and it may be that this anomaly will be addressed by the time the final legislation is published.
It’s also not clear from the draft legislation if the protection can apply to any transfer that takes place before 5 April 2023. This will need to be covered in the final legislation.
Differences from existing protections
Anyone with a protected tax-free cash amount or a protected pension age (members who before 6 April 2006 retained a right to take their pension benefits at an age earlier than the current rules allow) must take all their benefits under the pension scheme at the same time to benefit from these protections. This will not apply to the protection being put in place for the increase to the NMPA to 57. So, if someone can take benefits from age 55 from a pension arrangement they hold, they are able to take benefits in stages without losing the right to take benefits from age 55.
It's also worth noting the following:
- Anyone with an existing protected pension age of below 55 will see no change in respect of their current protections.
- If someone ends up with rights in an arrangement that could be subject to more than one protected pension age (for example, under the existing protected pension age rules and under the new protected pension age rules), then the younger age will apply.
Who may be affected?
For anyone who doesn’t have an unqualified right take benefits below age 57, an NMPA of 55 will apply up to and including 5 April 2028. The NMPA will then change to age 57 from 6 April 2028. There will be a number of people directly affected by this increase. For example:
- Those born before 7 April 1971 will be 57 by 6 April 2028 so would not be affected by this change irrespective of whether they had taken all, part or none of their benefits by then.
- Those born between 7 April 1971 and 5 April 1973 could be affected if they have not taken all their benefits before 6 April 2028. In a worst-case scenario, someone born on 5 April 1973 would be 55 on 5 April 2028. If they still had benefits to take at 6 April 2028, they would need to wait until they reached age 57 on 5 April 2030 before they would be able to do so. It’s important to note that this could impact people who choose to take their benefits in stages using a phasing option or who choose to use a drip-feed drawdown facility.
- Those born on or after 6 April 1973 will have a minimum pension age of 57 so will not be able to take any benefits until they reach that age.
The government have said that they will provide further guidance on proposed transitional arrangements aimed at those, for example, who do not have a protected pension age and have reached age 55 but not age 57 by 6 April 2028 and have started but not completed the process of taking their benefits.
The draft legislation is in the form of clauses to be included in the Finance Bill 2021-22 and there was a consultation on the clauses that closed on 14 September 2021. Taking this into account along with the fact that the Finance Bill will have to work its way through Parliament, and given the discrepancies we’ve identified above relating to block and individual transfers, there may be further amendments made to the draft legislation as time progresses.
Pensions Technical Services