Techzone

Minimum pension age

The current minimum age to take pension benefits is normally age 55, but there are some exceptions where benefits can be paid before the normal minimum pension age (NMPA). For example:

• Members in ill-health
• Survivors' pensions payable following the death of a scheme member
• Individuals who have a protected pension age
• On wind-up of an occupational pension scheme, where a small fund can be commuted under the grounds of triviality

Increase to age 57 from 2028

The NMPA will increase from 55 to 57 on 6 April 2028, to correspond with the increase in State Pension age to 67. The Government’s stated intention is to link the NMPA to 10 years below the State Pension age, so there’s an assumption that it will increase to 58 when the State Pension age goes to 68. However, the Government hasn’t built in an automatic link, so it will need to be legislated by the Government at the time.

The change to age 57 will affect most people born after March 1973, although public service schemes for Firefighters, Police and the Armed Forces will be unaffected by the change.

Protected pension age

A-Day protection - right to retire before ages 50 and 55

Individuals who were scheme members before 6 April 2006 (A-Day) could have a protected minimum pension age if they:

• had an 'unqualified' right to take their retirement benefits before age 55, or
• were a member of a scheme which had a pension age below age 50 due to the member having a special occupation, such as a professional sportsperson

The protected pension age remains available to these members as long as they don't do anything to break their protection, such transferring their pension (unless it meets the certain requirements) or taking their benefits in phases.

Occupational pension schemes

A pre A-Day occupational scheme member could take benefits before age 55 if the scheme rules on 10 December 2003 gave members a 'right' to do so and the individual was a member of that scheme on 5 April 2006.

Unqualified right: It's important to note that the member must have a right to take benefits from the scheme before age 55. Protection won't be available if it was simply an option that the scheme administrator could choose to offer.

Depending on the scheme rules, this could mean a pre-6 April 2006 member could take their benefits from age 50 rather than having to wait until age 55.

Furthermore, a scheme member with a 'special occupation', such as a professional sportsperson, could have a retirement age as low as age 35.

To exercise the right to take benefits before NMPA , the member must stop working for the sponsoring employer. Protection may be lost if the person becomes re-employed by the scheme's sponsoring employer or a company or individual connected to the sponsoring employer*. If protection is lost, any benefits paid before the NMPA would be taxed as unauthorised payments.

* A temporary suspension of the re-employment rule applied during the period 1 March 2020 to 1 November 2020 for individuals who had returned to work in relation to the Covid-19 outbreak. This ensured that they didn't suffer unauthorised payment tax charges on pension income received during this period.  

Personal pensions

Pre A-Day members of personal pensions and retirement annuities may also have the ability to take their benefits before age 55 if they had a special occupation. For example, a professional footballer could take their benefits from age 35.

If the benefit in the personal pension or retirement annuity originated in an occupational scheme with a low normal retirement date, the rules regarding the taking of benefits are the same as for an occupational scheme as described above.

2021 protection – right to retire at age 55 or 56

As with the earlier protections, the right to take benefits at age 55 or 56 after the NMPA changes to 57 is possible if the individual was in a scheme (whether personal or occupational) whose rules specifically gave an 'unqualified right' (see above) to retire at 55.

Members will need to check with their schemes as many SIPPs and personal pensions will have adopted model scheme rules which link the age benefits can be accessed to the 'normal minimum pension age' rather than an actual age such as 55. These schemes will not benefit from protection.

The protection is given when both the following conditions are met:

• On 4 November 2021 the individual was a member of a scheme that had an unqualified right to take benefits before age 57, or they were in the process of transferring to such a scheme*, and
• The scheme had the unqualified right within its rules as at 11 February 2021

* HMRC refer to this as a ‘substantive transfer’ and to qualify, the member must have made a request to transfer to the scheme with the right to the protected pension age, before 4 November 2021, which the administrator must comply with. A casual enquiry about transferring was not sufficient.

Losing a protected pension age

Pension transfers

A protected pension age is specific to the scheme that held the benefits on 5 April 2006 or 4 November 2021. The A-Day (pre age 55) protections will normally be lost if the benefits are transferred to another scheme - but there are some exceptions.

The pre 55 pension age will continue to be protected if:

• the transfer is part of a block transfer, or
• on scheme wind-up, benefits are transferred to an individual buyout contract (section 32) or assigned to the member, or
• a transfer is made to a scheme that already has the protected low pension age.

Schemes with a protected pension age of 55 or 56 can also maintain protection on block transfers. ‘Individual transfers’ will also keep this protection, but with less flexibility than the block transfer route.

Block transfers

A transfer is considered to be a block transfer if:

• Two or more members of a pension scheme transfer to the same receiving scheme at the same time, (although there is no requirement for both members to have protected pension age). The transfer must represent the members' total rights under the transferring scheme and be paid into just one receiving scheme
• In addition, for pre age 55 protection, the member transferring must not have been a member of the receiving pension scheme for more than 12 months. A member failing this criterion will not affect the rights of others who transferred under the block transfer. This is not a requirement for a block transfer with the 2021 protection of age 55 or 56.

A block transfer can also be used to protect those with scheme-specific tax-free cash protection.

Individual transfers

In addition to the block transfer route, for 2021 protection of ages 55 and 56, an ‘individual transfer’ will also preserve the protected pension age, providing the receiving scheme can administer it.

An individual transfer is just a regular transfer that doesn’t meet the block transfer criteria.

The difference between an individual and a block transfer is that under an individual transfer, the receiving scheme must ringfence the benefits with the protected pension age. So any future contributions or transfers to the receiving scheme, or any funds that it held prior to the individual transfer, won’t have the protected pension age. There will be a part of the scheme that will be able to be accessed at age 55 or 56, and a part that will be subject to the NMPA of 57.

Block transfers effectively treat the receiving scheme as if it were the original scheme, so any new contributions or transfers in will benefit from the protected pension age.

Transferring pensions in payment

Once benefits have come into payment (for example, individuals in drawdown) they can be transferred to a new scheme without loss of protection.

Transferring into a scheme with a protected pension age

Perhaps surprisingly, any benefits transferred into a pension scheme that has a protected pension age can also be paid from that special low pension age - even if they came from a scheme subject to the NMPA.

However, as mentioned above, this doesn’t apply when transferring into a scheme that has age 55 or 56 protection derived from an individual transfer. New monies coming in will go into a separate pot to which the NMPA will apply.

For pre age 55 protection, this only works where both schemes' rights are uncrystallised, due to the protected pension age criteria that all benefits under the scheme have to come into payment at the same time.

Phased retirement

Pre age 55 protection is lost unless all retirement benefits are taken from the scheme at the same time. This includes any transferred in benefits and means clients are unable to use a phased retirement strategy without potentially losing their protected pension age.

However, this is not a requirement for schemes with a protected pension age of 55 or 56. Protection is not lost if benefits are phased in, allowing individuals to take more flexible retirement options.

Lump sum allowance (LSA)

Individuals with a protected pension age between age 50 and 56 will not suffer a reduction in their LSA if they take benefits before the NMPA.

However, those with a protected pension age below age 50 are subject to a reduced LSA if benefits are taken before the NMPA. In these circumstances the LSA is reduced by 2.5% for each complete year before the NMPA.

For those with transitional protection, the available LSA is calculated using the standard LSA rather than their protected LSA.

If the person draws other benefits later, the amount already taken at the low pension age has to be taken into account. However, as long as the new benefits are being taken after the NMPA, they're tested against the remaining standard LSA (or protected LSA).

Certain statutory schemes, such as the police and armed forces, aren't subject to the reduced LSA if benefits are taken before age 55.

Ill-health - taking benefits before age 55

Benefits can be taken before age 55 if a scheme member is in ill-health and unable to work. Before benefits are taken HMRC require the scheme administrator to obtain written medical evidence confirming the member is 'incapable of carrying out their occupation because of physical or mental impairment and has actually stopped working'.

The ability to take benefits on the grounds of ill-health is also determined by the pension scheme rules and it's worth noting that some schemes impose a stricter definition of ill-health than HMRC. For example, the scheme's definition may state that 'the member is unable to carry out any occupation rather than their own occupation.

Serious ill-health

Benefits can also be taken before age 55 if there is evidence to show that the scheme member has a life expectancy of less than one year. In these circumstances, any uncrystallised benefits can normally be taken as a tax-free lump sum.

Please refer to our technical guide 'Pensions and ill-health' for full information on this subject.