NMPA adds risks to the pensions sector

25 April 2021

Pension experts have warned that the Government’s proposal to increase the minimum pension age to 57 is likely to add risks to the pensions sector.

The normal minimum pension age (NMPA) is currently set at 55, but the Government has announced plans to increase it to age 57 by April 2028, in line with the rise of the state pension age and to reflect longer life expectancy.

As the HM Treasury consultation on the proposed changes comes to a close, AJ Bell said changing the goalposts could create a ‘retirement lottery.’

According to AJ Bell senior analyst Tom Selby, the problem arises around plans to allow people with an ‘unqualified right’ to access their pension from age 55 to retain this benefit, provided they don’t transfer to a different scheme, while others will be unable to access their savings until age 57.

Selby said: “The Government’s proposed approach risks creating a retirement lottery based on how their scheme rules have been written. This would, entirely arbitrarily, create a world where some people can access their pension from age 55 and others from age 57. Many people would find themselves in the ludicrous position of having two otherwise similar pension pots which can be accessed from different ages.

“This approach risks creating damaging and entirely avoidable complexity. Furthermore, those who randomly find themselves in a scheme which allows access at age 55 may be deterred from moving their pension elsewhere, even if this is in their best interests to take advantage of lower costs, more investment options or better administration.”

Selby said this would create a “deeply undesirable” outcome which should be “avoided at all costs.”

As an alternative, AJ Bell has urged the government to increase the NMPA to 57 for everyone except members of the armed forces, police and fire service, which the firm believes would be an “infinitely simpler” approach and better reflect the policy intention of increasing the pension age in line with rising average life expectancy.

However, John Herbert, chief actuary at Premier Pensions, believes the government’s focus on a NMPA is misplaced and fails to achieve its objectives.

Herbert said: “The government believes a NMPA is necessary to prevent people using up their retirement savings too soon. However, a glance at how the NMPA works shows this makes little sense; if someone is determined to spend their pension pot as soon as possible, it really does not matter very much whether they can access the money at 55, 57 or State Pension Age – the result will be the same.”

Herbert said that the majority of people are responsible and careful about how they used their retirement savings so setting such a barrier is not necessary.

Herbert added: “A possible unintended consequence of the government’s proposal to raise the NMPA is that it could end up incentivising people to put money into Lifetime ISAs, which can be accessed without an exit charge at 60, rather than pension savings. This may well be the case if we believe that the NMPA will eventually rise again, to 58, then 60.

“When it does, the age at which a pension pot or Lifetime ISA can be accessed without an exit charge will be identical, with the result that putting money into a Lifetime ISA may be more attractive.”

Jessica List, pension technical manager at Curtis Banks, added that many savers and advisers will have been planning for an increase in NMPA “since it was first proposed seven years ago”. The main difficulty with the proposals, she said, was “the overly complex proposals for protected pension ages, which we believe could have unintended consequences that could affect retirees, advisers, and the industry for many years to come.

“It’s unclear why a more complicated system is being suggested now than in 2010, when a larger increase took place with less notice.”

Professional Paraplanner