Gareth James looks at what could hinder clients as the normal minimum pension age rises to 57
In 2014, the government confirmed its intent to increase the normal minimum pension age (NMPA) to 57 from April 2028. The aim being that NMPA should remain approximately 10 years below the state pension age (67 from April 2028) access point.
Until February, very little further detail about these plans was heard. Occasional questions from the industry or in Parliament were largely brushed off.
On 11 February, HM Treasury finally launched a consultation on the mechanics of the increase and confirming the intention and timing.
Given the timing and size of the change there was no certainty that we’d need a new protection regime.
This made it a surprise that, not only did the government confirm an intent to protect the NMPA of those whose occupations put them in a special position – the police, armed forces and fire service – but also indicated that protection may be available to millions of individuals in personal pension and other occupational schemes.
The protection regime implemented around the increase in NMPA in 2010 from 50 to 55, was largely restricted to members of occupational pension schemes. Not only was protection reliant on pension schemes having provided members with the unqualified right to take benefits from 50 - broadly described as giving the ability to take benefits without the consent of any other party, for example, an employer, trustee or administrator - but members themselves had to meet separate retirement conditions.
These included taking all benefits from the scheme on the same day, and no longer carrying out the occupation associated with the benefits accrued under the occupational pension scheme.
In contrast, this time around HMT intends not to limit protection to occupational pension schemes, as well as doing away with the requirements to take all benefits on the same day and to cease a linked occupation.
If protection of an NMPA is to extend to personal pension schemes then it wouldn’t make sense to retain these additional conditions, as they aren’t relevant or appropriate outside occupational pension schemes.
I suspect HMT believes extending protection to personal pension schemes reduces complexity between different types of pension whereas the opposite may be true.
HMT has though restricted protection to those who were members of schemes on 11 February 2021.
For advisers, there are immediate advice concern during the consultation period, with perhaps the most significant being whether a client’s protected right to take benefits at age 55 under the transferring scheme is lost if a transfer is completed, unless it is a block transfer.
An expanded protection regime introduces broader, long-term complexities for pension savers. For example, an 18-year-old who joined a personal pension scheme benefitting from a protected pension age on 1 February 2021 has to remember for 39 years that a transfer may mean protection is lost!
Block transfers at least offer a route to keep a protected pension age, but offering protection within personal pension schemes means we could see an explosion in their use, increasing complexity and the possibility of transfer delays.
Historically, block transfers to personal pensions have been the exception. The need to find a member already in the same occupational pension scheme looking to transfer to the same receiving scheme and the limited numbers benefitting from protection made sure of this.
If protection is opened up to personal pension schemes block transfers will become significantly more widespread. Savers holding protected pension ages could seek to artificially create block transfers to retain protection. To meet existing block transfer conditions, the individual transferring doesn’t need to find someone else holding protection, they can transfer with any member. Savers will simply ask family members to join the personal pension scheme to artificially create a block transfer.
Whilst this will be possible, the simple fact that a block transfer will be needed will discourage many people from transferring between pension schemes to what may be a more suitable or cheaper product. This is at a time when the Government is pushing consolidation with the pensions dashboards and plans to develop an automatic transfer system for small pots.
Outside this complexity, there will be accusations of unfairness between members of personal pensions depending on whether they hold protection. This may be a lottery; depending solely on the drafting whims of pensions lawyers who were writing trust or contract documents five to 10 years ago without a thought to protected pension ages.
Within personal pensions it isn’t unusual for the rights of savers to take benefits to be subject to the consent of scheme administrators. Whilst this need for consent will be unfelt by 99.9% of savers, who will think their benefit instruction is being followed automatically, in a world of pension scams and vulnerable customers it offers an important layer of protection where scheme administrators suspect harm.
If the threat of legal action over the loss of an unqualified right to take benefits at a particular age is a concern, this could be misplaced. The NMPA is a tax construct set by the government, setting the rate of tax which applies when benefits are taken at a particular age. It isn’t a right belonging to a member, the ‘loss’ of which can be challenged any more than the right to a personal allowance.
Beyond its use for more than a century in Heinz marketing messages, the number 57 doesn’t have a particularly interesting history. Let’s hope HMT reflects on the variety of issues we could be stuck with in the pensions world if they get the increase in the NMPA wrong.
Gareth James is head of policy at AJ Bell