Dave Downie, technical manager at Standard Life analyses the proposed increase in the normal minimum pension age, which pensions are protected and which not, and how the change may affect client recommendations.
The age at which someone can take their pension benefits is set to rise from 55 to 57 in 2028. Around one in five existing Standard Life Platform drawdown customers accessed benefits before their 57th birthday, so it is important advisers and paraplanners understand which of their clients may be affected by this change.
In line with earlier pension age increases it is intended that there will be protection for certain pension scheme members to continue to take benefits from age 55. But this may not be as widely available as you might expect and may be lost if the pension is transferred.
Who is affected?
The normal minimum pension age will increase to age 57 on 6 April 2028. There will be no phasing of its introduction resulting in a cliff edge situation. This means:
- Those born after 5 April 1973 will see their minimum pension age delayed by two years
- Those born between 5 April 1971 and 5 April 1973 will have a window from their 55th birthday to 6 April 2028 to take benefits before the minimum pension age increases to 57. If they don’t access their pension during this time, they will need to wait until their 57th birthday
- Those born before 6 April 1971 are unaffected and will still to be able to take benefits at age 55.
Protected pension ages
Anyone with existing protected pension ages is unaffected by this latest increase. This will include those whose occupation enjoyed special early retirement ages prior to A day, such as professional sportspeople, and also those who retained an early pension age in 2010 when the minimum pension age changed from 50 to 55.
This latest consultation includes further protection for those individuals in schemes which at the date of the consultation (11 February 2021) gave them a right to take benefits at age 55.
However, this appears to be causing some confusion with many believing that because they currently can access benefits at age 55, this gives them a protected pension age.
Ultimately the scheme rules will determine whether protection is available. Most personal pension based schemes simply define the earliest retirement age as the normal minimum pension age. So as this increases, so too will the date at which members can access their benefits. When the minimum pension age moved from 50 to 55 there was no protection in these cases and it is expected that it will be the same for this latest change.
Only where the member of the pension scheme has “an unqualified right” to take benefits prior to 57 will a protected pension age be possible. This isn’t simply the ability to take benefits at age 55, but rather that the member doesn’t need the consent of the trustees, scheme administrator or employer to take benefits at this age. This is more likely to apply to certain occupational schemes rather than for personal pensions.
These changes are still at the consultation stage, but they’re widely expected to be introduced. However, there is a retro-effective element to them which could have an impact on current pension transfers.
Transferring out of a scheme which has a protected pension age will result in the loss of the right to take benefits from age 55. This includes any transfer made after 11 February 2021.
Therefore, care is needed for current and future transfers where the transferring scheme has confirmed that the client has a protected pension age and the client wishes to retain the ability to take their benefits from age 55.
However, it’s intended that block transfers, i.e. where two or more members of a pension scheme transfer into the same receiving scheme at the same time, will continue to retain their protected pension age.
Drawdown to drawdown transfers
One possible oversight in the consultation proposals is that there’s no mention of protection for transfers of pensions already in payment. Hopefully, this will be addressed during the consultation process and anyone who has gone into drawdown at age 55 and subsequently transfers to a new drawdown provider will not have to wait until 57 to continue drawing benefits.
No need to retire or crystallise 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. However, it’s proposed that this requirement won’t 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 in order to protect a client’s pension age in that scheme from the 2028 increase.
Impact on advice
Protected pension ages are likely to be the exception rather than the norm, so many individuals will simply see the earliest age at which can take benefits increase to age 57 on 6 April 2028.
Clients who retain ambitions to retire at 55 but don’t have a protected pension age may need to rely on other assets or income sources to bridge the gap until they reach 57. If clients cease working at 55 and see their income fall, it can offer a window to access other savings tax efficiently. It could mean they can extract chargeable gains from investment bonds with little or no further tax to pay and capital gains on unit trusts/OEICs could be realised at basic rather than higher rates.
The starting point for any client seeking to transfer is to determine whether they have a protected pension age under their existing arrangement. Remember this must be an ‘unqualified right’ to take benefits at 55 and not just a current option to take them at this age. So check the scheme rules if this is unclear or check with the provider.
The protected pension age could be lost on transfer even if the transfer takes place before the new rules are enacted. Of course this only matters if the ability to retain the option to access benefits at 55 is important to the client.
Of course it’s worth remembering we’re still at the consultation stage. An increase to the minimum pension age has been on the cards for a long time and is likely to happen. But there could still be changes to the suggested implementation and protections once the consultation has concluded and we get to see the draft legislation.
In the meantime, it’s important to set expectations on when clients may be able to access their pension.