HM Treasury outlined plans on Thursday confirming the government’s intention to raise the normal minimum pension age from 55 to 57 in April 2028, while devising a “protection regime” that ensures some scheme members retain their current rights.
The proposal, now the subject of an open consultation, would see existing scheme members retain their right to access their pensions at 55, while those who become members of schemes after the date of the consultation will be subject to the updated rules.
This change, which is intended to maintain the 10-year gap between the age at which people can access their state and private pensions, was welcomed by the industry, though serious misgivings exist about its logistical and administrative implications.
Although these are not officially linked, respondents to a 2014 consultation on increasing the normal minimum pension age expressed a wish for it to be raised proportionately in line with the state pension age. From 2028 these will be ages 57 and 67 respectively.
These rules are complex and can prevent individuals benefiting from pension freedoms by taking the most suitable option for their circumstances
Andrew Tully, Canada Life
In its consultation document, the government stated that it “believes that increasing the minimum pension age reflects increases in longevity and changing expectations of how long people will remain in work and in retirement”.
Schemes will be afforded the right to choose how to implement the rise so long as it is accomplished by April 2028. They may act before then if they so wish.
Due to their special circumstances, members of the police, firefighters and the armed services will not have the increase applied to their schemes.
Michael Ambery, partner at Hymans Robertson, noted that "many individuals and corporate sponsors will need to carefully consider" the implications of the proposed change.
“In particular it will have an impact [...] on the timing of when they take their pension benefits. Individual pension savers could be put off by changes that on the face of things may just sound like you need to work for longer and money is locked away,” he said.
Ambery suggested that, in the current environment, saving for retirement may not be everyone’s first priority and measures like those proposed by the Treasury “may feel unpopular”, and individuals will need help with the “juggling act” that is determining when best to access benefits.
“Communicating [the change] clearly to members will be key to ensure that any change legislation is understood and made appropriate for the individual investor. Focus should be on how providers of pensions and corporates deliver the changes through pension scheme design and via member engagement/wellbeing,” he said.
‘Protection regime’ could create ‘second class’ schemes
LCP warned that the proposals risk creating a “second class” of pension schemes. Under the proposed “protection regime”, people in schemes that are already open — as of the date of the consultation — will be able to access their money from age 55, and this right continues to apply even for money paid in after Thursday.
However, those in pension arrangements joined or opened from February 12 will be subject to the NPA increase in 2028.
This will be particularly relevant for those in or below their forties, who will only be able to access their pensions before age 57 if they are already a member of a scheme, the consultancy noted.
Those who start new jobs and are auto-enrolled into a scheme from the day after the consultation will lose the ability to access their pension at age 55, which they would have retained had they stayed in their existing arrangement.
Individuals who do not have a protected pension age but who take scheme benefits before age 57 will, as of April 2028, be subject to unauthorised payments tax charges.
Meanwhile, employers will be faced with the administrative difficulties of managing the transitional arrangements, which may have to run two parallel sets of rules for schemes set up before and after the consultation.
Former pensions minister and LCP partner Sir Steve Webb said: “There will be a need for clear communication with members to make sure they understand the different rules that may apply to their different pensions. As we move towards an era of pension consolidation, members will have to be careful not to accidentally throw away protected rights to access a pension at age 55.”
Block transfer rules hinder pension freedoms
Andrew Tully, technical director at Canada Life, welcomed the certainty provided by the consultation, which he said would “give time for appropriate planning over the next seven years”.
However, while the protection regime covering those who currently have a right to take benefits before age 57 was a positive step, he expressed his disappointment at the government’s proposed continuation of ‘block transfer’ rules.
A block transfer occurs when two or more people transfer to and from the same scheme at the same time, and the government’s proposals would see these members retain their existing protections if subject to such a change.
However, if they transfer individually, they will not benefit from that protection.
Govt opts for deferred choice underpin solution to McCloud
The government has confirmed it will opt for the deferred choice underpin solution to the McCloud problem, which despite being the right choice according to pensions specialists, will open the floodgates of administration woes for public sector schemes.
Tully told Pensions Expert: “I’d like the government to allow people to keep their entitlement to a lower pension age following any transfer — not just a very specific type of transfer.
“These rules are complex and can prevent individuals benefiting from pension freedoms by taking the most suitable option for their circumstances.
“Removing the block transfer rules and allowing those affected to keep their entitlement to a lower pension age on transfer would be a positive move,” he concluded.
