Reminder – what does this all mean?
To recap, the normal minimum pension age (NMPA) is the age at which you may first access your pension plans. This is different to the state pension age, and refers to your ability to take withdrawals from your pension pot, or start to receive income from a final salary pension scheme. The NMPA has been 55 since it was increased from 50 back in 2010, but will now rise to 57 due to this change.
Find out if you will be affected using the below:
- Those born before 6th April 1971 (age 57+ on 5th April 2028) may continue accessing their pension at age 55.
- Those born after 5th April 1973 (age under 55 on 5th April 2028) must wait until they are 57 to access their pension.
- Those born between 5th April 1971 and 5th April 1973 (age 55-56 on 5th April 2028) will have an opportunity to access their pension from their 55th birthday to 6th April 2028. After this, they will need to wait until their 57th birthday to do so.
One saving factor for many affected was the possibility of pension age protection. Those with protected pension ages have their NMPA fixed at a certain age, and therefore will not be affected by the age increase. The initial draft for this change stated that there would be a window of opportunity for people to seek out pension schemes with a protected pension age and transfer into them, thus securing their NMPA at 55. However, this has changed in the Finance Bill.
Window to secure protected pension age is now closed
First let’s clarify what is meant by protected pension age. Every pension scheme has scheme rules, and part of these rules refer to the age at which the member can first access their pension benefits. Some schemes, mostly occupational schemes (taken out by your employer), will explicitly mention the pension age as 55 in their rules. This would be known as a protected pension age of 55, since it is protected from the planned increase. Other schemes, for example most personal pensions and SIPPs, will state that the NMPA will be adopted. Currently the NMPA is 55, but this will increase to 57 from April 2028.
Therefore, those members of the first type of scheme have their pension age fixed at the age stated in the rules. The NMPA increase will not affect them as long as the rules give an ‘unqualified right’ to retire at age 55 (or earlier if relevant).
In the initial draft of the Finance Bill, the Government said that members would have until 5th April 2023 to transfer to a scheme with a protected pension age. Naturally, this lead to many people and Financial advisors seeking out these schemes and hoping to transfer into them and benefit from a protected pension age of 55.
However, the confirmed Finance Bill has removed this window of opportunity. After further consideration, the decision was made to prevent the option of transferring schemes for the benefit of a protected pension age. The driving force behind this was fears of members being forced into changing schemes based on one factor. In reality, a pension scheme should be suitable in many ways, rather than just freezing the pension age at 55.
The new rules state that those schemes that gave the right to take benefits at age 55 as of 11th February 2021 will be able to protect that age. New members joining those schemes by 3rd November 2021 would also receive the same protection. Any clients who were in the process of transferring to one of these schemes before 3rd November can still benefit from the protection even if the transfer completes after that date.
Transferring away from a scheme with a protected pension age
There will be some members in these schemes with a protected pension age but would like to move away to a different scheme. The good news, you are not trapped. In regards to doing this, the rules are:
- For a block transfer (also called a buddy transfer) – this is where more than one member transfer out of a scheme at the same time and into the same receiving scheme. The rules for these kinds of transfer allow the protected pension age to remain with the new scheme, and for any new contributions made into that scheme.
- For individual transfers, the amount transferred to the receiving scheme will be ringfenced and will benefit from the protected pension age. Any new contributions made will follow the normal scheme rules, and most likely have a NMPA of 57.
- For those with protected pension ages of less than 55, for example members from a certain profession or those benefitting from a protected pension age of 50 back in 2010, the protected age will be lost unless a block transfer is carried out.
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How does the increase affect planning ahead?
In reality, age 57 is still a relatively young age to retire. Only the more affluent members of society will be able to afford to retire at 55 or 57. Since this is many years before the state pension begins, they will need significant amounts of savings to maintain their standard of living for such a long period of time. Most people retiring at this age will more than likely have savings outside of their pensions, and these can be called upon if necessary to bridge the gap between 55 and 57.
For those that do retire early, given that ISAs or investment accounts make up part of your estate when you die, it would be a sensible option to consider spending from these first. Pension pots sit outside the estate and therefore allowing them to grow further is no bad thing. This is especially true considering that death benefits from pensions are paid to beneficiaries free of tax if you die before age 75.
The more significant point to be made is that choosing a pension scheme should be based on ensuring you have flexible options for taking benefits, the costs are suitable, and the investments available are wide-ranging. Whether you take benefits at age 55 57 or some years later, you may be using that pension scheme for the rest of your life. So make sure it is one that works for you.
A small number of people will reach age 55 in 2027 and start accessing their pension using flexi-access drawdown. Once April 2028 comes, they will need to wait until they are 57 to continue taking benefits, so this should be planned for ahead of time. One option is to crystallise a larger amount than is necessary in 2027 so that it can be called upon to bridge the gap. Alternatively, other savings can be used to fill this void.
Most people should not be severely affected by this NMPA increase. Those aiming to retire at age 55 and have mainly savings in pensions will need to re-think their plans. The truth is that there will be more NMPA increases in years to come. As we all live longer, the Government must take these steps to ensure people are not outliving their retirement savings.
If you would like guidance on your particular situation, get in touch with us.