Financial PlanningRetirement PlanningAAM UK State pension changes

The UK Government have confirmed that the minimum pension age is to rise – what does this mean for you?

The UK Government has confirmed a rise in the minimum pension age to 57 from April 2028.

The minimum pension age is the earliest age you can access your UK pensions, personal and employer provided.

The legislation to enable the increase to the minimum pension age sets out conditions which may allow some pension savers to keep a minimum pension age of 55 beyond 2028.

Schemes that offered the right to take benefits at 55 in their rules as at 11 February 2021 will be able to protect that age for existing members and any others that joined that scheme by 3 November 2021.

Those who were in the process of transferring to such a scheme before this date can still retain the protection if the transfer completed afterwards.

This article looks at the increase to the normal minimum pension age (NMPA) and the implications it may have for your retirement planning.

It is important to note that there can be changes between the Finance Bill becoming the Finance Act however the details here provide you with an opportunity to review your retirement plans.

Who and when?

The NMPA will increase to age 57 on 6 April 2028. This increase to the NMPA has been in the pipeline since 2014. There will be no phasing of its introduction. For those without a protected pension age, this means:

  • if you were born before 6 April 1971, you will be unaffected as you will have reached age 57 before the 6 April 2028
  • if you were born after 5 April 1973, you will have the earliest date you can access your pension benefits delayed by two years
  • if you were born between 5 April 1971 and 5 April 1973, you will have a window from your 55th birthday to 6 April 2028 to take benefits before the NMPA increases to 57. If you do not access your pension during this time, you will need to wait until your 57th birthday

So, what does this mean for you?

This latest change to the NMPA will be less keenly felt than previous increases. A two-year delay is much easier to plan for than the five-year increase to the retirement age in 2010 or the loss of certain A-Day protected ages, such as for professional sportsmen/women, who could have seen retirement plans delayed by up to 15 years.

Protected pension ages are likely to be the exception rather than the norm, so you are most likely to simply see the earliest age at which you can take benefits increase to age 57 on 6 April 2028.

This will not be an issue for most people. Of more importance is that they are in a scheme which provides a wide range of investment solutions and is able to offer all the flexibilities and benefit choices introduced under ‘pensions freedoms’ in 2015.

If you are fortunate enough to be able to afford to retire at age 55, there will be other ways, probably more tax efficient ways, to make this possible. You may well have significant savings in other tax wrappers such as ISAs, bonds, and collectives. All of these will be included in your estate for Inheritance Tax (IHT) and so it makes sense to reduce this potential liability by accessing these first in a tax efficient way, making the most of tax allowances and lower tax bands.

This even makes sense beyond age 57 as, in most cases, pension savings are protected from IHT, income tax and Capital Gains Tax. And on death before 75, for personal arrangements beneficiaries will be able to take the death benefit tax free.

It may be that you have other savings that could be used to bridge the gap between 55 and 57. However, before drawing down on pension savings, it should be remembered that you will have to wait an additional two years before claiming your State Pension at 67, which may call into question the affordability of early retirement.

If you reach 55 in 2027, you may start to take some of your pension benefits but then must stop further new withdrawals from April 2028 because you are still below age 57. This may need to be planned for by either making sure you designate enough into drawdown before 2028 to cover your needs or bridge the gap using other savings.

Schemes with protected pension ages

Protection is only given if the scheme rules specifically gave an ‘unqualified right’ to retire at 55. This is not simply the ability to take benefits from age 55, but rather that the member doesn’t need the consent of the trustees, the scheme administrator or employer to take benefits at this age. Consent is likely to be a more common feature in occupational schemes.

However, many SIPPs and personal pensions will have adopted model scheme rules which link the age benefits can be accessed to the ‘normal minimum pension age’ rather than an actual age such as 55. These schemes will not benefit from protection. Clients in schemes with existing protected pension ages, such as pre-A-Day occupation related early retirement ages and those who retained an early pension age in 2010 when the NMPA changed from 50 to 55, will not be affected by this latest increase.

Transfers from schemes with a protected pension age

Individuals in protected schemes are not stuck where they are and will be able to maintain protection on transfer, though what is protected depends on the type of transfer.

A block (buddy) transfer, where more than one member of a scheme transfers at the same time to the same receiving scheme, will maintain the protection on the funds transferred and any new monies that are paid into that new scheme.

An individual transfer will also maintain the protected age, but the funds transferred will be ring-fenced in the receiving scheme and no new contributions can be made to that arrangement. Any new money paid in would go into a separate arrangement that would have a minimum pension age of 57.

Protected pension ages are not a new concept. They were introduced in 2006 to allow schemes that had lower retirement ages linked to certain occupations to be retained. And protection was available again when the NMPA was increased from 50 to 55. However, in both cases, transferring would lose the protected age unless it was a block transfer.

No need to retire or take all benefits

A current condition of taking benefits with a protected pension age is that the member must crystallise all the benefits under the scheme at the same time.

This requirement will not apply to this new protection. Members should therefore be able to access benefits flexibly without losing their protected pension age.

Additionally, there will be no requirement to stop working for the sponsoring employer of the occupational scheme to protect a client’s pension age in that scheme from the 2028 increase.

Summary

The increase in the NMPA will not be relevant unless you have definite plans to retire at 55 and your only savings are in pensions. If you have other forms of saving, it may be more efficient to look to these to provide for early retirement if that is your goal. If you do not have other forms of savings, it may be worthwhile to consider putting them in place.

If you have a scheme with a protected age of 55 you will not be restricted to staying in that scheme forever and will have transfer options available to you although advice is essential before taking any action

Speak to your AAM Wealth Manager or contact us now to arrange an Audit of your pension provision.

 

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