Techzone

The Finance Bill has confirmed a rise in the minimum pension age to 57 from April 2028.

It also sets out the conditions which may allow some pension savers to keep a minimum pension age of 55 beyond 2028. Of most note is a change from the draft rules, which has closed the window for transferring into a scheme to secure a protected pension age.

Schemes that had the right to take benefits at 55 in their rules as at 11 February 2021 will be able to protect that age for existing members and any others that joined that scheme by 3 November 2021. Clients who were in the process of transferring to such a scheme before this date can still retain the protection if the transfer completes after.

The original draft rules published earlier this year would have allowed individuals to transfer to a scheme which had a protected retirement age of 55, provided this was done before 5 April 2023. The Government amendment in the Finance Bill followed concerns from the industry that the window could have opened the door to scammers pressurising savers into rushed transfers.   

This insight looks at the increase to the normal minimum pension age (NMPA) and the implications they may have for advice.

It’s important to note that there can be changes between the Finance Bill becoming the Finance Act, but it gives a framework for advisers to start setting expectations and planning with their clients.

Who and when?

The NMPA will increase to age 57 on 6 April 2028. This increase to the NMPA has been in the pipeline since 2014. There will be no phasing of its introduction. For those without a protected pension age, this means:

• Clients born before 6 April 1971 will be unaffected as they will have reached age 57 before the 6 April 2028
• Clients born after 5 April 1973 will have the earliest date they can access their pension benefits delayed by two years
• Clients born between 5 April 1971 and 5 April 1973 will have a window from their 55th birthday to 6 April 2028 to take benefits before the NMPA increases to 57. If they don't access their pension during this time, they will need to wait until their 57th birthday

So what does this mean for advice?

This latest change to the NMPA will be less keenly felt than previous increases. A two year delay is much easier to plan for than the five year increase to the retirement age in 2010 or the loss of certain A-Day protected ages, such as for professional sportsmen/women, which could have seen retirement plans delayed by up to 15 years.

Protected pension ages are likely to be the exception rather than the norm, so the majority of your clients may simply see the earliest age at which can take benefits increase to age 57 on 6 April 2028.

This won't be an issue for most people. Of more importance is that they're in a scheme which provides a wide range of investment solutions and is able offer all the flexibilities and benefit choices introduced under 'pensions freedoms' in 2015.

For those who can afford to retire at age 55, there will be other ways, probably more tax efficient ways, to make this possible. Higher net worth individuals may well have significant savings in other tax wrappers such as ISAs, bonds and collectives. All of these will be included in a client's estate for IHT and so it makes sense to reduce this potential liability by accessing these first in a tax efficient way, making the most of tax allowances and lower tax bands.

This even makes sense beyond age 57 as, in most cases, pension savings are protected from IHT, income tax and CGT. And on death before 75, beneficiaries will be able to take the death benefit tax free.

For the less affluent, other savings may also be used to bridge the gap between 55 and 57. However, before drawing down on pension savings, it should be remembered that they'll have to wait an additional two years before claiming their State Pension at 67, which may call into question the affordability of early retirement.

There may be some clients who say reach 55 in 2027, start to take benefits under phased drawdown and then have to stop further vesting from April 2028 because they're now below age 57. This may need to be planned for by either making sure they designate enough into drawdown before 2028 to cover them for the next year, or bridge the gap with other savings.

Schemes with protected pension ages

Protection is only given if the scheme rules specifically gave an 'unqualified right' to retire at 55. This isn't simply the ability to take benefits from age 55, but rather that the member doesn't need the consent of the trustees, the scheme administrator or employer to take benefits at this age. Consent is likely to be a more common feature in occupational schemes.

However, 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. Clients in schemes with existing protected pension ages, such as pre A-Day occupation related early retirement ages and those who retained an early pension age in 2010 when the NMPA changed from 50 to 55, will not be affected by this latest increase.

Transfers from schemes with a protected pension age

Individuals in protected schemes are not stuck where they are and will be able to maintain protection on transfer, though what is protected depends on the type of transfer.

• A block (buddy) transfer, where more than one member of a scheme transfers at the same time to the same receiving scheme, will maintain the protection on the funds transferred and any new monies that are paid into that new scheme.

• An individual transfer will also maintain the protected age, but the funds transferred will be ring-fenced in the receiving scheme and no new contributions can be made to that arrangement. Any new money paid in would go into a separate arrangement that would have a minimum pension age of 57.

Protected pension ages are not a new concept. They were introduced at A-Day to allow schemes that had lower retirement ages linked to certain occupations to be retained. And protection was available again when the NMPA was increased from 50 to 55. However in both cases, transferring would lose the protected age unless it was a block transfer.

No need to retire or crystallise all benefits

A current condition of taking benefits with a protected pension age is that the member must crystallise all the benefits under the scheme at the same time.

This requirement won't apply to this new protection. Members should therefore be able to access benefits flexibly without losing their protected pension age.

Additionally, there will be no requirement to stop working for the sponsoring employer of the occupational scheme in order to protect a client's pension age in that scheme from the 2028 increase.

Summary

The increase in the NMPA will not be relevant to many, unless they have definite plans to retire at 55 and their only savings are in pensions. For those with other forms of saving, it may be more efficient to look to these to provide for early retirement if that is their goal.

Those clients who have a scheme with a protected age of 55 won't be restricted to staying in that scheme forever and will have transfer options available to them.