Increasing the normal minimum pension age for Pensions Tax
In July, HMRC published a consultation on draft clauses for the Finance Bill 2021-22, including provisions which will increase normal minimum pension age (“NMPA”) for pensions tax purposes from age 55 to 57. This is designed to coincide with the rise in state pension age to 67 from 6 April 2028, and follows a consultation in February 2021 on the proposed framework.
The consultation on the draft clauses asks whether the draft legislation works as intended.
In this response
NMPA, which is currently age 55, is the earliest age at which a member’s benefits can generally be taken under a registered pension scheme without higher tax charges applying. However, benefits can be paid from an earlier age if a member has a “protected pension age” (“PPA”) or because of ill-health. When benefits actually commence will be dictated by a scheme’s rules.
The new protection regime will apply to all types of registered pension scheme, ie both occupational and contract based. In brief, this new protection regime will only apply to individuals who have an actual or prospective right under their pension scheme as at 5 April 2023 to take any benefit before age 57. That right must have been embedded in scheme rules as at 11 February 2021, the date on which the Government’s original consultation was published.
As drafted, the legislation will therefore introduce a “window of opportunity” for individuals to join a scheme on or before 5 April 2023 to gain a PPA. The Government states that this is consistent with the approach that was taken when NMPA rose from age 50 to 55 in April 2010.
As with the existing regime, where certain recognised transfers take place between schemes a member’s PPA will be preserved. On a block transfer, ie where the benefits of at least two members form part of a single transaction, a member’s PPA will apply in relation to all benefits including future build-up. Recognising the retirement flexibilities now available to pension savers, a PPA may also be preserved on an individual transfer. But the protection in these cases will only apply to benefits built up before the transfer, requiring assets representing transferred-in rights to be ringfenced in the receiving scheme.
Pinpointing a single date (ie 5 April 2023) for assessing individual eligibility to a PPA has a number of knock-on effects. This includes that, as drafted, a PPA will seemingly only be retained in respect of a transfer which takes place on or after 6 April 2023.
We have the following concerns about the proposed approach outlined in the draft legislation:
- a transfer taking place prior to 6 April 2023 would not appear to retain a member’s PPA. In contrast, a transfer on or after that date would, albeit with different outcomes as to ringfencing for bulk and individual transfers
- as the DWP is actively encouraging greater consolidation of schemes, the above approach seems inconsistent with that policy. The upshot may be to deter schemes which would otherwise have consolidated from doing so until after April 2023 if transferring to a scheme that does not have a PPA of its own, or lead to them choosing a consolidator that would not otherwise have been chosen, because it has a PPA, when it may not be the most appropriate choice in other respects
- whilst we understand the rationale for following the same approach as for the existing PPA regime, this was established against the backdrop of the overhaul to the pensions tax system as at A-Day (6 April 2006). The pensions landscape has changed considerably since, with retirement flexibilities and moves towards greater consolidation driving increased transfer activity
- in addition, the “window of opportunity” approach may play into the hands of scammers, who could use the lure of a lower PPA to persuade members to move to an otherwise unsuitable vehicle
- the consequence of the drafting could create a scheme rules lottery, meaning that a member transferring their benefits before 5 April 2023 could retain a PPA of less than 55 for some benefits (assuming the conditions are met), but would not be able to do so in respect of any right to take benefits between ages 55 and 57, depending on how scheme rules are drafted and whether they expressly reference age 55 or refer to the “normal minimum pension age” under legislation. This also depends on how the proposed “entitlement condition” is interpreted; we note that more than one interpretation is possible
- if the above outcomes are inconsistent with the Government’s policy intent, we would suggest reworking the drafting of the legislation: (a) to include a transitional provision; and (b) clarify the extent of the “entitlement condition” in order to provide certainty as to when this would be satisfied. This could specifically allow a member of a scheme who has a right to a PPA of less than 57 at any time on and from 11 February 2021 up to and including 5 April 2023 to retain that right on a recognised transfer before 6 April 2023.
As a final general comment, and whilst we would defer to their views regarding the practicalities of new regime, we are aware that concerns have been raised by administrators, insurers and personal pension providers, amongst others. In particular, these relate to the administration of the ringfencing requirements for individual transfers and member communications for those considering a transfer now (see also below).
Clients are already raising concerns about what and how to communicate to members on this issue. Schemes processing transfers would want to work out how to communicate what PPA a member has a right to under their current scheme, and to convey any warnings about the potential loss of these, especially in relation to transfers before 6 April 2023 as things stand. Similarly, receiving schemes need to be able to communicate what PPA a member might benefit from under the new scheme.
Will guidance be provided to schemes in the short-term to assist with this?
Given that the draft legislation will impact transfers already taking place, will it and any related guidance be finalised and published as soon as possible? We believe this to be essential for clarity and certainty. As changes are pegged to 11 February 2021, the clock is already ticking.
The Government notes that there may be other transitional issues. For example, where an individual who does not have a PPA between ages 55 and 57 reaches age 55 in the run-up to 6 April 2028 and has started, but not completed, the process of taking benefits. We appreciate that “further advice… and provisions” are to be expected “in due course”. As many more members are retiring flexibly than would have been the case in 2010, schemes will be keen to receive clarity around these run-up transitional provisions as soon as possible.
We would suggest that, to cover the run-up to retirement in the transitional six months to 6 April 2028, the Government consider mirroring the legislation and guidance produced covering the same issue in 2010. Those provisions clarified the “freezing” of NMPA at the date a member (having reached NMPA) had taken all steps necessary under the scheme rules to bring their benefits into payment, even if they were not physically put into payment until after the increase in NMPA (with similar provisions applying to any tax-free cash taken on retirement). Given the proximity to Easter, they also gave some flexibility to members turning 50 in the days immediately before the change in NMPA.
The existing regime specifically caters for the retention of PPAs on a TUPE transfer, reorganisations and winding up. We assume that the same concessions will be provided here.