Ian Neale, co-founder of Aries Insight, outlines UK law complexities and reveals proposed legislation that will not bring simplification

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Most of us look forward to not having to work anymore. Once upon a time, people could anticipate their retirement date with some certainty, and plan ahead. Early retirement happened to some who could afford it, or in ill health where enhanced pension benefits were on offer. But mostly your retirement date was set by the pension scheme rules.

Times are changing though, especially in the private sector. Rather than stopping work one day and starting to live on a pension the next, it’s possible to transition into retirement with overlapping sources of income. Employers can no longer retire you automatically when you reach a certain age. Workers have more choice about when they retire, assuming that is, if their health permits.

There are limits though; especially on how early pension scheme benefits can be taken. Prior to 6 April 2006, all occupational pension scheme rules had to stipulate a normal retirement date (NRD) in the range 60–75, though early retirement was permissible from age 50. A few, mainly professional sports players, could have a special early retirement age.

Then came ‘A-day’ and a new concept in the Finance Act 2004 (FA 2004): ‘normal minimum pension age’ (NMPA). Defined as the earliest date at which pensions and lump sums may normally (unless the ill-health condition is met) be taken without triggering an unauthorised payments tax charge, this was set initially at age 50. From 6 April 2010, it became 55 (by virtue of section 279, FA 2004); but members already entitled to retire at 50 kept that ‘protected pension age’ (PPA) (by virtue of paras 21–23 to Schedule 36, FA 2004).

Then the coalition government announced in 2014 that NMPA would rise to 57 in 2028, to coincide with the increase of state pension age to 67. In spring this year HM Treasury consulted on implementation and, following consideration of 140-odd responses, in July published draft legislation.

Some respondents had argued unsuccessfully for a simpler transition this time: no protection regime and all members not already pensioners or enjoying an existing PPA should have a NMPA of 57. The consultation had proposed some simplification, namely to remove the requirements to cease work with the employer and crystallise all benefits on the same date in order to maintain a PPA; but that’s all.

Existing PPA rules require an individual wishing to preserve a PPA on transfer to another pension scheme to team up with at least one other member wishing to do the same thing, in a ‘block transfer’. In a significant relaxation of these much-criticised rules, individual transfers are also to be allowed to preserve a PPA. However, PPA transferred rights will have to be ringfenced in the receiving scheme: the PPA will not apply to other rights members accrue there.

So, pension providers will have to grapple with another set of PPA rules – and this is where the law really gets complicated. Some individuals will still be able to take benefits from age 55 (or an earlier PPA if they have one), including all members of the uniformed services.

The government is to introduce a window of opportunity for others to join pension schemes which offer a PPA (i.e. the scheme rules on 11 February 2021 already confer an unqualified right to take benefits below age 57) and they join that scheme by 5 April 2023.

There’s been a lot of anxiety expressed about what would amount to ‘an unqualified right’. Where the scheme rules expressly state that benefits can be drawn from age 55, the government considers that would meet the condition. Conversely, where the rule refers to the NMPA or its underlying legislation, that would not.

The government is refusing to define this crucial point in law and suggests trustees and scheme managers might need professional advice on what rights their rules confer. Those familiar with recent court cases centred on what scheme rules say about inflation increases will have a sense of deep foreboding about the costs ahead.

The policy intention behind the move to a NMPA of 57 is to encourage individuals to save for longer for their retirement, and so help ensure people have financial security in later life, while delivering indirect benefits to the economy through increased labour market participation.

For most workers in the private sector, it will make little or no difference to their expectation of retirement. Few can afford to cease work long before their state pension age, currently 66; or have a money purchase pot big enough to fund a significant drop in earnings from going part-time. Flexibility and choice for those without a significant final salary pension, is often a mirage.

As always though, the voice of the wealthier minority in favour of preserving pre-existing pension rights is more audible. Thus, it is that while craving simplification we despair at the remorseless complification to be endured instead. 

• Policy article
• Professional magazine