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A later normal minimum pension age and a frozen lifetime allowance: how to prepare

  • United Kingdom
  • Pensions

25-03-2021

 

Speedy summary: tax-related pension changes

This speedbrief looks at the planned increase in the normal minimum pension age in 2028 and the freezing of the lifetime allowance. Preparing for these tax-related changes will mean planning and member communications. Further details and suggested action points are set out below.

Normal minimum pension age increase

Last month, HM Treasury issued its consultation to increase the normal minimum pension age (NMPA) from 55 to 57 on 6 April 2028. The change will affect all registered pension schemes, not just occupational schemes.

As a reminder, the NMPA, currently 55, is the earliest age at which members of registered pension schemes can access their benefits without incurring an unauthorised payments tax charge (unless they are suffering from ill-health or have a “protected pension age”).

Some suggested NMPA action points

  • Take initial legal advice on which scheme members could benefit from the new protected pension age. This will depend on the drafting of individual scheme rules. Initial advice should then be confirmed once the legislation is available.
  • If your member communications say members can take their benefits from age 55, they will need to be updated to refer to the increase to age 57 in 2028. Any detailed description of the changes is, however, best left until the government confirms the wording of the legislation.
  • Consider with your investment advisers the impact on your investments and in particular on defined contribution “lifestyle” options.
  • The government notes that some schemes may decide to move to the new NMPA of 57 before 2028. This is unlikely to be common but, if considering this, get legal advice first on whether this is a valid option for your scheme.

What does the NMPA consultation say?

New protected pension age – Helpfully, the government intends to offer protection like that introduced when the NMPA rose from 50 to 55 in 2010 (there are some differences – see below). The consultation says this “will only apply to those individuals who have an existing right within their scheme rules at the date of this consultation to take pension benefits before age 57”.

This means that a member of a registered pension scheme who has the ‘right’ under the scheme rules at the date of the consultation (11 February 2021) to take pension before age 57 would be protected from the increase in 2028.

A ‘right’ means that someone does not need the consent of any other person (such as the employer or trustees) before they can take their benefits. This applies to both past and future benefit accrual and would depend on a scheme’s specific rules.

How is the proposed new protected pension age different from the old one? – The new protected pension age is different in two key ways. First, individuals with the new protected pension age can draw benefits while still working and, secondly, benefits under the scheme need not all start at the same time (subject to scheme rules).

Like the existing protection, however, the new protected pension age will be lost on a transfer of benefits unless it is a defined ‘block transfer’. The current block transfer rules are fraught with potential traps that are difficult to navigate and frequently cause practical issues – we will not know if any of these is resolved in the new regime until the government publishes its legislation.

What about those who currently have a protected pension age under 55? – Individuals with an existing protected pension age (under 55) should see no change to their current protection. In addition, the government recognises the special position of members of the armed forces, police and fire service - they will not be affected by this change.

Other points to note – The government previously indicated that the NMPA should remain ten years under state pension age (SPA) but it has now said that it does not currently intend to link NMPA rises automatically to SPA increases.

Timing – The consultation closes on 22 April 2021. The government then plans to publish draft legislation in summer 2021 and to implement the changes in the Finance Bill after that.

Lifetime allowance frozen for five years

The Chancellor announced in his Budget earlier this month that the standard lifetime allowance (LTA) will remain at £1,073,100 for at least the next five tax years (2021/22 to 2025/26). This freeze takes effect from 6 April 2021 and breaks the current link between the LTA and the consumer price index. The government expects to raise around a billion pounds in extra tax revenue from this approach.

As a reminder, the LTA is the maximum amount of tax relieved pension savings an individual can build up over their life. A significant lifetime allowance tax charge is payable on the excess. Various forms of protection have been made available to provide shelter against previous reductions in the LTA – there will be no new form of protection this time because the LTA is not reducing.

Some suggested LTA action points

  • Some retirement packs already issued may have assumed an increase in the 2021/22 LTA. If so, re-issue these, explaining the reason for the change.
  • Update administration systems to reflect the frozen LTA.
  • Update booklets and other member communications which refer to previously expected rises in the LTA.
  • Consider identifying members who are now more likely to be affected by the LTA and think about how (and if) you wish to address this. An excepted life assurance scheme, where the lump sum death benefit falls outside the LTA calculation, is one option worth considering – for more information see our speedbrief.

What is the effect of the frozen LTA?

The immediate effect is that the expected rise in the LTA, around £5,800 from 6 April 2021, will not now happen.

The Budget documents say that “95% of savers approaching retirement are unaffected” by the LTA. However, the LTA will now start to affect more people over time. This could lead some people with significant pension benefits to reduce their working time or retire earlier than originally planned. For example, it has been suggested that many doctors may choose to stop working for the NHS as a result.

This change also makes retirement planning more challenging, particularly for those close to the LTA. It could potentially motivate a shift away from pension saving and into alternative tax efficient vehicles such as ISAs and Lifetime ISAs. It will also increase the attractiveness of unregistered arrangements, such as excepted life assurance schemes.