Increase in Normal Minimum Pension Age: for the many but not the few?

In 2014 the Government announced that the minimum age at which most members could be permitted to draw their pension benefits without penal tax charges (for both member and scheme) would rise from 55 to 57 with effect from April 2028. Seven years later and, following a public consultation, on 20 July 2021 HMRC published a policy paper and draft legislation setting out its proposals for implementing that change to the Normal Minimum Pension Age ('NMPA'). Certain aspects of the draft legislation were changed without warning on 4 November 2021 when the Government published the Finance Bill (No. 2) Bill 2021-22 (the 'Bill'), which legislates, amongst other things, for the increase in NMPA. Louise Pettit takes a look at what the Bill says and, in particular, examine the new protections proposed for those members who currently have a NMPA of between 55 and 57 and how those compare to current similar protections. They then outline some initial next steps for trustees and their advisers to help them get ready for the change.

Who should read this update?

NMPA is a concept that applies to all occupational and personal pension schemes. This update will, therefore, be of relevance to all those involved in workplace pensions including trustees, employers and advisers. 

Recap: What is NMPA?

NMPA is the earliest age at which members can access their benefits under a registered pension scheme unless one of a limited number of exemptions applies. NMPA is currently 55 but was 50 between 6 April 2006 and 5 April 2010. If benefits are paid before NMPA, the payment will be unauthorised and subject to penal tax charges (for both the member and scheme). The circumstances in which benefits may be paid to an individual before NMPA are:

• where they meet the criteria for an ill health early retirement pension or serious ill health lump sum payment
• where they are a member of a scheme that is excepted from the usual NMPA requirements (such as those for firefighters, police and the armed forces – known as ‘uniformed services pension schemes’ in the legislation)
• where they have a protected pension age (discussed in more detail below but effectively a transitional protection for individuals who would have been adversely affected by the NMPA increase)

With effect on and from 6 April 2028, under the Bill, NMPA will increase from age 55 to age 57. This mirrors the increase in state pension age to age 67 which will take effect on and from the same date.

Protected Pension Age

The concept of a protected pension age ('PPA') is not new. Increasing the age at which individuals can access their pension benefits without attracting penal tax charges has real consequences for individuals who may have been intending to retire at the earliest opportunity and have planned their finances on that basis. Recognising this, transitional protection, in the form of the PPA, was introduced when NMPA was brought in at A Day and again when it was increased to 55 in April 2010.

To claim a PPA, an individual had to have an unqualified right before 6 April 2006 to draw their benefits before NMPA. HMRC’s 'Pensions Tax Manual' provides guidance as to what is meant by an 'unqualified right'. Broadly, an individual has an unqualified right to take benefits if they do not need the consent of either the trustees or the employer before they can take their benefits. The individual must also meet other criteria specified in the Finance Act 2004 including that they had the right under the rules of the scheme or contract on 10 December 2003 or they acquired the right in accordance with that scheme’s provisions as they stood at 10 December 2003, upon joining the scheme after that date.

The Bill proposes introducing a new PPA for anyone who, on or before 3 November 2021, is or becomes a member of a scheme whose rules as at 11 February 2021 gave them an unqualified right to take their benefits between 55 and 57. Making a retrospective amendment to introduce such a right will not be possible. HMRC guidance is awaited as to what is meant by an 'unqualified right' for the new PPA but it is likely that the same interpretation will apply as for the existing PPA. The original draft legislation proposed in July provided for a 'window of opportunity' to allow anyone who joined a scheme on or before 5 April 2023 to gain the new PPA (where the rules of that scheme as at 11 February 2021 gave them an unqualified right to take their benefits between 55 and 57). However, following stakeholder concerns, the Government decided to close that window of opportunity without advance warning as at 23.59 on 3 November 2021 instead of 5 April 2023 as originally envisaged. The Bill contains provision for an individual who made a request to transfer before 4 November 2021 to still receive the new PPA protection in the receiving scheme.

In the same way as the existing PPA, the new PPA will apply to all benefits accrued in the protected scheme after 5 April 2028. For individuals who benefit from a PPA under the rules of a DB scheme, the PPA will also apply to DC benefits accrued in a separate new section of the protected scheme post DB closure, even where the rules of the DC section require third party consent to draw benefits before NMPA. In determining who may benefit from the new PPA, trustees and administrators must determine whether the individual had an unqualified right to draw their benefits before reaching 57 on 11 February 2021 or they acquired the right in accordance with the scheme’s provisions as they stood at 11 February 2021, having joined the scheme between 12 February 2021 and 3 November 2021.

There are some key differences, however, between the existing PPA and the new PPA. Trustees and administrators need to be aware of these and ensure their systems can accommodate the additional administrative requirements.

Immediate takeaways for Trustees and their advisers

• Check your scheme’s rules and/or contractual documentation to determine what is the NMPA for each category of member and whether anyone may have a new (or existing) PPA. Ensure administration systems correctly record the position, paying particular attention to any benefits that have been transferred into the scheme. Some scheme rules will refer to the NMPA as defined in legislation from time to time whereas others may refer to a specified age at which members can draw their benefits. Where rules have been updated over time, it may be necessary to refer back to earlier rules to check if an inadvertent change may have been made. Seek legal advice where needed to confirm the position and to discuss whether any amendments are needed to the rules to reflect the forthcoming change in NMPA.
• Pay particular attention to DC sections of hybrid schemes to see if any members have a new (or existing) PPA, particularly where the DC section may have been established upon closure of a DB section of the same scheme and/or where the employer may be considering whether to bulk transfer benefits to a master trust. Seek advice if unsure so you can ensure you do not do anything that may inadvertently cause a member to lose a new or existing PPA.
• Once you have confirmed the position, clearly communicate this to members so that they know what their NMPA is under the scheme and what this means regarding when and how they can access their benefits. There are concerns that having different PPAs with differing conditions as to when that protection may be lost may lead to more individuals falling victim to a scam. This will be a greater risk for any individual who has benefits in more than one scheme, one of which has a PPA whereas the others do not. Be clear as to how you communicate the NMPA/PPA regime in general terms before specifying what the position is under the rules of your scheme.
• Discuss and agree whether your scheme will accept transferred-in benefits with a new (or existing) PPA and whether to restrict the categories of transfers-in you will accept e.g. block transfers, individual transfers, partial transfers. Most scheme rules give trustees the discretion whether to accept transfers. In deciding whether to accept transfers-in of new PPA protected benefits, speak to your administrators to ensure that their systems are set up to ring fence transferred-in benefits where required (both from an administration perspective and also in terms of allocating investment returns). Check whether the additional administration will incur additional charges.