Increase in NMPA explained

The normal minimum pension age (NMPA) is the earliest age at which a pension scheme member can access their benefits without a tax charge. Since 6 April 2010 the NMPA has been age 55, before then it was age 50. But from 6 April 2028, the NMPA will increase to age 57. This coincides with the rise of the state pension to age 67.

If a pension scheme pays benefits to a member before the NMPA, unauthorised payment charges will apply unless:

• the benefits are being paid on ill-health grounds; or

• the member has a right to take benefits before the NMPA.

The Finance Act 2022 provided the framework for the increase in NMPA including who will be able to maintain the current NMPA, how transfers work when an individual has a protected pension age and how future accrual with be treated. This article explains each of these in more detail.

The increase in NMPA to age 57 will generally apply to all schemes, but a pension age of 55 (or 56) can be protected for those who:

• are in a uniformed services pension scheme; or

• were in a pension scheme on 4 November 2021 that offers an unqualified right to take pension benefits from age 55 (or 56). That right has to have been written into the scheme’s rules as on 21 February 2021.

Despite the NMPA not changing until 6 April 2028, the final rules came into effect from 4 November 2021, meaning there are immediate considerations for both transfers with protection and subsequent benefit accrual.

In addition to the above anyone who already has a lower protected pension age as a result of the A-day changes, or age 50 from the 2010 changes, will retain that right.

Transfers

Where an individual has pension rights with a protected NMPA of 55 (or 56), due to them having an unqualified right in their scheme rules, there are two main ways these rights can be transferred:

• individual transfer; or

• block transfer.

An individual transfer is where either:

• pension rights from a ‘55 scheme’ are transferred to another pension scheme on an individual basis (i.e. not part of a block transfer); or

• pension rights that have protected pension age as a result of a previous individual transfer are subsequently transferred to another pension scheme.

Following an individual transfer, the transferred rights keep an NMPA of 55. However, any existing or future benefit accrual – including from any future contributions – will have an NMPA of 57. (The only exception would be other individual or block transfers into the scheme with protection.)

A block transfer involves two or more clients transferring (as part of a single transaction) all of their pension rights from the same ceding scheme to the same receiving scheme.

Where the rights with the protected age have been transferred to a different pension scheme as part of a block transfer, the protected pension age will apply to all pension rights under the new pension scheme. This includes any pension pot already built up, any further contributions, and any other pension rights that are transferred into that pension scheme (regardless of whether those transferred pension rights had a protected pension age or not).

These are effectively a ‘new’ type of block transfer specifically to preserve this type of protection. Unlike block transfers of scheme-specific protected tax-free cash or pension ages from A-day, there is no requirement to have been a member of the receiving scheme for less than 12 months or to take all retirement benefits at the same time.

Taking benefits

Where a scheme member has a protected pension age of 55 (or 56), they should be able to access their pension benefits which have that protection once they reach that age.

There is no requirement to fully crystallise the funds, so they have the choice of fully crystallising the pension or multiple partial benefits crystallisation events (BCEs).

There is no additional reduction of the scheme member lifetime allowance (LTA) for taking benefits before 57. Members could crystallise up to 100% of the standard LTA at the time of the BCE, or their protected LTA if they have any transitional protection in place.

This change has introduced for the first time the concept that an individual scheme can have multiple pension ages for different portions of the same pension fund. Previously, either all the pension rights within the fund benefited from the protected pension age, including future accrual, or the whole scheme could only be accessed from the NMPA.

As such, the new protection regime is wide ranging and complex. It’s important to consider how rules work on transfers happening now to ensure your clients have the opportunity to benefit from as much flexibility as possible.