NMPA – more complex than it looks

I have been working in pensions for over 30 years. I have mainly made my living by taking complicated technical pension rules and turning them into simple, easy-to-understand language. Some aspects of pensions have become easier to understand over time. But one recent development that has gone the opposite way is the increase in the normal minimum pension age (NMPA).

You may know the NMPA is increasing from age 55 to age 57 from April 2028. You may have parked that in the ‘useful to know but doesn’t really affect our clients just yet’ bucket. Unfortunately, it does – because of the protection regime.

The majority of financial advisers’ clients will be in pension schemes that have to increase their NMPA to 57 from April 2028. But some pension scheme members can protect an earlier NMPA.

There are broadly three different groups of people who can protect an earlier age. Firstly, those who already have a protected early NMPA as a result of the A-day changes (that increased the NMPA to 55 from 2010).

Secondly, those who are in a uniform pension scheme (for example the police) who get to keep their earlier NMPA.

And thirdly, those who are in a pension scheme that offers an unqualified right to take pension benefits from a specific age which is younger than 57 get to protect that earlier age. That right has to have been written into the schemes rules as at 21 February 2021 (the date the original consultation on this increase in NMPA was published). If the individual was a member of such a pension scheme at 3 November 2021 they get to keep the earlier access age for the benefits in the pension scheme and any new contributions paid into the pension scheme.

If the individual was transferring into such an ‘age 55’ scheme but hadn’t managed to complete the transfer before 4 November 2021 (when the draft Finance (Number 2) Bill was published), then they would get the protection as long as they had requested the transfer on or before 3 November.

So far, this sounds OK. Increase to age 57 for nearly everyone, except those mentioned in the three categories above.

The complication really kicks in when we get to talking about transfers between this final category of ‘age 55’ schemes and other ‘age 57’ schemes.

If the individual has built up benefits in an age 55 scheme, and wants to transfer any benefits from an age 57 scheme to this age 55 scheme, then we believe the draft legislation allows them to do this. If they do, then all the benefits in the age 55 scheme (including those transferred in) can be taken from the earlier NMPA without any unauthorised payment charges. (There has been some confused messaging from the Treasury on this point.)

If the individual wants to transfer their age 55 benefits into their age 57 scheme, then they can do this. The age 55 benefits will be ringfenced and can still be taken from the earlier age. But this places the pension scheme in the undesirable position of having two different NMPAs for one pension scheme member. So that’s two different NMPAs on statements and illustrations, and, eventually, on the pensions dashboard.

However, there is another scenario. If the individual chooses to transfer their benefits from their age 55 scheme to their age 57 scheme as part of a block transfer then the receiving pension inherits the protection and the member can take all their pension benefits (including the age 57 benefits and any new contributions paid in) from age 55.

And to make it even more complicated, the rules for these block transfers are not the same as the rules for block transfers relating to the A-day changes. Two or more people have to move as a block from the same pension scheme to a new pension scheme at the same time. But then, unlike the 2010 rules, they don’t have to take all their benefits at one time, instead they can partially crystallise.

These rules are going to cause administration headaches. Some pension schemes may choose not to accept transfers-in with age 55 benefits, or may not offer members the ability to ringfence these benefits and take them at an earlier age.

This is draft legislation, but it looks like it will be enacted on this basis. You may now want to find out which of your clients have age 55 benefits. This won’t necessarily be obvious, and you may want to check with each scheme. These clients have the advantage of being able to take benefits earlier, and you may want to help them keep that flexibility. Even if, in the long run, they never use it and access their pension aged 57 or over.

This article was previously published by Professional Paraplanner