Protection headaches for the masses?

The Treasury has recently released its consultation paper on how the increase in normal minimum pension age (NMPA) is implemented. We have known for several years that the increase from age 55 to 57 was planned to take effect from 6 April 2028, so there is no surprise in the increase itself.

What is somewhat startling, is the level and nature of protection on the table, which will not only dilute the effectiveness of any raise for decades to come, but also has the potential to create transfer headaches with immediate impact.

When we last had an increase in NMPA (from age 50 to 55), protection was only available in certain circumstances in occupational schemes. This time round, it is proposed that any scheme – defined benefit or defined contribution, occupational or personal – could potentially have a protected retirement age of 55. It boils down to whether there was an ‘unqualified right’ in the scheme on 11 February 2021 – the date the consultation was published. Scheme rules will vary, and the definition of what is meant by an unqualified right is being hotly debated amongst pension techies.

Regardless of where the line is drawn, having any protection is going to cause issues.

It’s important to note that under the proposals, all funds built up in the scheme will have the protection – not just those accrued prior to 11 February 2021.

Like all other scheme-specific forms of protection, the protection is lost on transfer unless it is part of a block transfer where two members transfer from one scheme to the same receiving scheme and certain conditions are met. This time round though, it isn’t going to be just sports professionals and a few occupational schemes offering protection, it will include many workplace pensions and personal pensions.

If clients are wanting to retire at 55 – or at least wanting to retain the option of taking benefits from that age – then this impacts transfers happening today. You may not even know for sure if they have the right to access their pensions at age 55 from the scheme they are leaving as it’s not yet clear – but transferring them out of a scheme they were in on 11 February means they may be losing that right.

If the rules do come in as proposed, then this is clearly a barrier to transfer. Move and you lose the right. Or alternatively, find a buddy to do it with – so potential for lots of artificial transactions where your partner joins your scheme with a minimum contribution just to transfer across with you.

The changes are seven years away, and relatively few people access benefits before age 57. All this mess could be avoided with a clean move to age 57 for all (except for those who already hold a lower protected pension age). Otherwise a 16-year-old who joined a pension scheme at the start of the year and remains in the scheme (or only makes block transfers) could still access all their benefits at age 55 in 2060 – 32 years after the minimum age was raised.

This article was previously published by Sipps Professional