As part of our series helping paraplanners prepare for their exams, the Brand Financial training team look at minimum pension age and state pension age.
Those of you with clients who are coming up to retirement age will probably be aware of the forthcoming increase to the state pension age.
Between 2026 and 2028, an increase will be gradually phased in so that the state pension currently available from the age of 66 can only be accessed from age 67. This will be subject to a further increase to 68, which is currently scheduled under to occur by 2046.
Not quite so well publicised, but still of importance to financial planners, is the parallel legislation which ties minimum pension age to the state pension age. Currently, the minimum age at which members are able to access a pension pot, other than in cases of ill health, is 55. This was previously set at 50 as of A-day (6 April 2006) and increased to 55 as of 6 April 2010.
However, it is government policy that the minimum pension age should remain ten years below the state pension age. Therefore, the Finance Bill 2021-22 contained legislation to increase this to 57 as of April 2028. It is worth noting that this will not apply to the uniformed public service schemes (broadly, the police, fire service and armed forces).
When the original minimum pension age was introduced in 2006, and when it was subsequently increased in 2010, the legislation contained a get-out clause. Fundamentally, in 2006, certain classes of persons were permitted to retain a right to take benefits before the minimum pension age.
These were mainly sports persons and individuals in hazardous occupations, who had a normal retirement age below 50 approved by HMRC. For these members to protect their right to an early pension age, all the following conditions had to be met.
• On 5 April 2006 the member had the right to take a pension and/or lump sum before the age of 50;
• The right was unqualified in that no other party need consent to the individual’s request before it becomes binding upon the scheme or contract holder;
• The member’s occupation on 5 April 2006 was, or had been, an occupation prescribed under the Registered Pension Schemes (Prescribed Schemes and Occupations) Regulations 2005
When the minimum age was subsequently raised to 55, protection was offered to members of an occupational or public service scheme who had a contractual right under the rules of their scheme to take their retirement benefits at an age prior to the new minimum pension age of 55. In order for a protected retirement age to be available, the following criteria had to be met:
• the member must have had the right on 5 April 2006 to take a pension and / or a lump sum at a minimum age between 50 and 54;
• the right must be unqualified;
• the right must have been set out in the scheme rules on 10 December 2003 (the date the minimum pension age increased from age 50 to age 55 was announced); and
• the member must have had that right on 10 December 2003 or acquired the right when they joined the scheme if this was after 10 December 2003.
However, there was a catch. Where any member of a scheme with such a protected early retirement age transferred their benefits out of that scheme, this would usually result in the protected early retirement age being lost. This would be the case unless the transfer was either a block transfer or a transfer to another scheme under which the member already had a protected early pension age.
A block transfer in summary means the following:
• it is a transfer of the pension rights relating to the member and at least one other pension scheme member;
• the transfer is made as a single transaction;
• the transfer represents all the pension rights under the scheme for all the members transferring as part of that single transaction; and
• before the transfer the member had not been a member of the receiving scheme for more than 12 months.
This therefore cannot usually apply to retirement annuity contracts or deferred annuity contracts such as a section 32 plan, since these are by definition one member schemes. However, there is provision in legislation for a transfer to be treated as a block transfer where either it is being made from a scheme which is winding up or the rights have been extinguished by the purchase of a deferred annuity policy. It therefore follows that advisers need to be careful when recommending transfers out of such schemes, as they may be inadvertently surrendering their client’s right to vest benefits early.
2028 protection is based on a similar concept. In summary, it applies where, under scheme rules, the member had an unqualified right before 4 November 2021 to take pension and/or lump sum prior to the age of 57 which was written in the scheme rules prior to 11 February 2021. This also applies to members who, on 4 November 2021, were in the process of a substantive transfer to a scheme which would have met the requirements.
The big difference with 2028 protection is that it allows for the concept of the individual transfer. This basically means that members with a protected pension age of 55 or 56 can transfer their pension rights at individual arrangement level and retain their 2028 protected pension age in the receiving scheme. The whole arrangement must be transferred, but it is not a requirement to transfer all arrangements held within the scheme. There is no requirement for the member to have a protected pension age already in the receiving scheme.
The main caveat to this is that the receiving scheme will need to effectively ring fence the assets transferred from the protected scheme. Protection will only apply to the transferred assets and income arising from them. The purpose of the legislation is to ensure that the protected benefits are only maintained and not enhanced. They will therefore need to be segregated from rights accrued by direct pension contributions or transferred in from other schemes.
This offers potentially wider planning opportunities for clients with protected early retirement ages. However, it has the potential to cause an administrative burden for the receiving scheme and it is not a given that every receiving scheme recommended will be set up to facilitate this. We would suggest paraplanners check the position with the suggested new provider before recommending a transfer out of a scheme with a 2028 protected retirement age.
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