Tax Doctor: the new minimum pension age

The case

Julie is a self-employed accountant. Throughout her working life, she has accumulated 12 years of service in a defined benefit scheme, and a SIPP worth £256,000. She was born in May 1973 and will be 48 on her next birthday.

Julie plans on buying a holiday home in a few years’ time and wants to know from what age she can take her pension benefits. She has looked up her state pension age and knows it will be 67. She has also heard that the minimum pension benefits age is 10 years before the state pension age. So she wants to know if it’s 57 or not.

The prescription

The minimum age someone can access benefits from used to be age 50. This was increased to age 55 as part of the A-Day simplification legislation, but the change only took effect from 6 April 2010. This was a cliff-edge increase, but people were warned of the change and had the time to prepare for it.

The aim was for the minimum age to remain at 10 years below state pension age. So back in 2014, the Government said it intended to increase the minimum age to 57 at the same time the state pension age increased to age 67. The state pension increase will be phased in between April 2026 and April 2028.

However, the increase to the minimum benefits age has not yet been legislated for. A few months ago, when this issue was raised as a Parliamentary question, the Treasury confirmed it was still the intention to increase the age to 57 in line with the state pension age.

This should be an easy thing to legislate for, and the Treasury could have the opportunity to slip the new rules into a finance bill over the next year or so.

But up to that point, we have little to go on in terms of how this increase will work in practice, and what it means for Julie’s retirement plans.

Will it be a single cut-off date or will it be phased in over two years? A timetable could be adopted which mirrors the increase in the state pension age. But this would be extremely confusing for people. I would be surprised if most people reaching state pension age in this timeframe could say with any certainty what their state pension age is – even recognising it will be 66 plus a few months.

A single cut-off date at 6 April 2028 seems simplest, and Julie should probably plan on this basis. As she was born in May 1973, she will be 54 when the increase comes in. She could therefore find she cannot access her pension benefits until age 57. (If she had been born just a couple of months earlier, she could have a state pension age of 67 and a minimum benefits age of 55.)

Julie also has deferred defined benefits. Back in 2014, when the increase was first mooted, the intention was that all schemes would be caught, except public sector schemes that do not link their normal pension age to the state pension age – for example, schemes for firefighters, police officers and the armed forces. However, this has yet to be confirmed, and different approaches may be adopted for different types of scheme. Julie may find she can access her defined benefits from age 55 but can’t access her SIPP benefits until the age of 57.

At the moment, all we know is change is (probably) coming, but we don’t know the details. Julie needs to keep an eye out for this legislation getting the green light to put her in a position where she can set her retirement plans in motion.

This article was previously published by New Model Adviser