Pension age headaches persist

I last wrote about the changes to Normal Minimum Pension Age (NMPA) back in October, when the rules were still under consultation. The industry had highlighted many issues with the proposals and asked for a re-think in terms of how the changes were brought in.

When the draft legislation came out there was a small bit of good news, in that the window for transferring to a protected scheme was closed there and then in November, rather than dragging on for another 6½ years and creating all kinds of artificial arrangements. However, many of the other issues remain.

The rules bringing about the change became law as part of this year’s Finance Act. So we know that anyone born on or after 6 April 1973 will have to wait until age 57 to access their pension unless they have a protected pension age (PPA) or meet the ill-health criteria. Those born on or before 6 April 1971 will be unaffected as they’ll already be 57 or over when the change comes in. For those in-between they’ll have the option of accessing benefits when they reach age 55, but if they haven’t done so by 6 April 2028 they’ll have to wait until 57. This should be straightforward enough, although we have yet to have the details to confirm this group will be allowed to continue taking their benefits before age 57 after 6 April 2028.

It’s when we look at the protection that things get really messy, and the issues raised at consultation stage have been largely disregarded.

First is the issue of how a scheme qualifies for protection. The “entitlement condition” is met if the scheme gave members an unqualified right to take benefits before age 57. The guidance on when this condition is met isn’t clear – and the advice from HMRC is to consult a pension lawyer if a scheme isn’t sure if its rules meet the condition or not. The problem is that the pension lawyers aren’t all in agreement, even when looking at the same set of rules. So it is possible that disputes on this could end up in court a few years down the line.

Transfers are problematic on a number of levels. Individual transfers from a PPA scheme to a non-protected scheme should see the PPA rights ring-fenced with the PPA still applying to them. However, currently there is no requirement to pass this information over on transfer, schemes aren’t set up for ringfencing, and some may not want to pay out under age 57 after 6 April 2028 due to the risk of the ceding scheme’s interpretation of the law being wrong. Block transfers also keep the protection, but without the need for ring-fencing as the PPA will apply to all benefits under the new scheme.

The ring-fencing of benefits, when available, and the resultant situation of two pension ages under one scheme stores up a host of problems for schemes and customers; from simpler statements, to adding confusion to pension dashboard information, and clouding how small pots can be automatically consolidated.

This legislation creates far more problems than it solves. Steering away from a cliff edge is usually a good idea. But with so many caveats, would we be better just taking the plunge?

This article was previously published by Sipps Professional