The government has confirmed it plans to legislate to increase the normal minimum pension age from age 55 to age 57 from 6 April 2028 in the next Finance Bill. The legislation will include a protection regime for savers who already have an unqualified right to access their benefits before age 57.

Following the recent consultation on its plans to implement the new normal minimum pension age and the proposed protection regime, the government has confirmed that the draft legislation will include:

  • measures to enable an individual to retain a protected pension age following an individual transfer (as well as following a block transfer, as originally proposed)
  • a joining window to enable individuals who join a pension scheme with a protected pension age before 5 April 2023 to be able to benefit from the protection, and
  • transitional measures for members who will not benefit from a protected pension age and who will be between age 55 and age 57 on 6 April 2028.

Trustees, providers and employers need to consider the impact of the increase in the normal minimum pension age on their scheme and on individual members. It is also important they engage with the draft legislation when it is published to ensure the protection regime will operate as intended.

Background

The normal minimum pension age is the earliest age at which most savers can access their benefits under a registered pension scheme without paying an unauthorised payments charge (unless they are suffering from ill health). Since 6 April 2010 it has been set at age 55.

The coalition government originally announced an intention in 2014 to increase the normal minimum pension age from age 55 to age 57 in 2028 to coincide with the increase in the state pension age to age 67. In February, the government confirmed that it plans to make this change and published a consultation paper to seek views on how it plans to implement this with a particular focus on the protection regime for individuals who have an existing right to access their pension benefits before age 57.

The government believes that increasing the normal minimum pension age is necessary in light of the long-term demographic changes in the UK and the changing expectations around how long people will remain in work and how long they will spend in retirement. To help individuals and schemes prepare for the change, the government intends to publish draft legislation for a protection regime and legislate for this rise in the next Finance Bill.

The government’s position is that, in principle, it remains appropriate for the normal minimum pension age to remain around 10 years under state pension age, although it does not intend to link NMPA rises automatically to future state pension age increases at this time.

Government’s proposals

In its consultation paper the government confirmed that the normal minimum pension age will rise to age 57 on 6 April 2028. The consultation also set out the government’s proposals to introduce a protection regime for individuals who have an existing right to access their benefits before age 57.

Under this regime an individual who is a member of a registered pension scheme the rules of which on 11 February 2021 conferred an unqualified right for the individual to take their pension benefits earlier than age 57 will be eligible for a protected pension age. This will mean that the individual will continue to be able to take their benefits from that earlier age.

In addition, in recognition of the special position of members of the armed forces, police and fire services the government does not intend for this increase to apply to individuals in the related pension schemes, even if the relevant scheme rules did not confer a protected pension age on members on 11 February 2021.

The government also proposed that:

  • where a member benefits from a protected pension age this will apply to benefits accrued on and after 6 April 2028 as well as those accrued prior to that date
  • a protected pension age will be specific to an individual as a member of a particular scheme meaning it will not apply to membership of other schemes of which the individual is a member where there is no right to a protected pension age under those schemes
  • an individual with an existing protected pension age will see no change in respect of their current protection
  • an individual will not lose a protected pension age if they are transferred to a different scheme by way of a block transfer
  • a member will not need to have stopped working for their employer when taking benefits in order to enjoy a protected pension age (unlike under the protection regime that was introduced when the normal minimum pension age was increased from age 50 to age 55 on 6 April 2006)
  • an individual will not be required to crystallise all of their benefits on the same date (or within a prescribed period) in order to maintain a protected pension age (again, unlike under the 2006 regime).

The government also confirmed that there is no intention to change the basis on which members can access pensions early on grounds of ill-health.

Consultation Response

The majority of respondents supported the government’s proposals, including the proposed protection framework. However, issues were raised with the following elements of the proposed regime:

Protection following individual transfers

The government proposed that members should retain their protected pension age when they become a member of another scheme as a result of a block transfer, but the proposals did not address the position following an individual transfer. Many respondents questioned why the two types of transfer should be treated differently, particularly in an environment where there may be good reasons for an individual to transfer their benefits from one scheme to another, for example, to enable them to access drawdown or to reduce costs. It was felt that the protection regime should not deter members from making transfers in such circumstances.

In response, the government has said that the legislation will allow members to retain their protected pension age following both block and individual transfers. However, the government also confirmed that following any such transfer the protected pension age will not apply to the other rights which an individual accrues in the receiving scheme where those benefits would not otherwise qualify for a protected pension age. It is envisaged this will require transferred-in benefits which benefit from a protected pension age to be ring-fenced in the receiving scheme in these circumstances.

When does a person have an unqualified right to take their benefits?

Most respondents requested clarification about when an individual has an unqualified right to access their benefits and therefore becomes eligible for a protected pension age. However, the government has ruled this out suggesting that trustees and scheme managers are best placed, with the benefit professional advice, to determine what rights their rules confer.

Alongside this, some respondents asked when people needed to have become a member of a scheme in order to benefit from a protected pension age. In response, the government has confirmed that it will introduce a window up to 5 April 2023 to give individuals an opportunity to join a pension scheme which offers a protected pension age (i.e. where the scheme rules on 11 February 2021 already conferred an unqualified right to take pension benefits before age 57) and still benefit from the protection.

Impact on pension flexibility

Concerns were raised about circumstances in which a scheme’s rules may confer an unqualified right to take some benefits (or benefits in a particular form) before age 57 but not others. It was pointed out that the proposed protection regime could skew the decision-making for some members by forcing them to take benefits in a form they might not otherwise have done in order to access them early. While the government recognises these concerns it has said that it does not want to restrict an individual’s rights by depriving them of choices currently available to them.

Implications for schemes and sponsors

Trustees, providers and scheme sponsors should consider the implications of the increase in the normal minimum pension age for their scheme and determine whether their members will be able to continue to access their benefits from age 55 (or any earlier PPA to which the members may already be entitled) from 6 April 2028.

Where the age at which an individual can access their benefits will increase as a result of this change, trustees, providers and employers should consider when, and how, they will inform members to ensure that individuals have sufficient warning and can plan accordingly.

Contacts

If you wish to discuss how the new increase in the normal minimum pension age may impact your scheme or organisation please speak to your usual Herbert Smith Freehills’ adviser or contact one of our specialists.

Tim Smith
Tim Smith
Professional Support Consultant, London
+44 20 7466 2542
Olivia Kettleborough
Olivia Kettleborough
Professional Support Paralegal, London
+44 20 7466 3653

 

 

 

 

 

 

 

 

 

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