Increase in Normal Minimum Pension Age

December 3rd, 2009

The world of pensions is constantly moving, with changes either due to be implemented or currently being discussed.

One of the changes due with effect from 6th April 2010 is an increase in the age from which you will be allowed to access your pension (normal minimum pension age or NMPA) from 50 to 55.  This change will apply unless you fall into one of the following categories:

  • You are a member of an occupational pension scheme and had a contractual right to take benefits from age 50 (or earlier) as at 10th December 2003, and you still had this contractual right on 6th April 2006.  This will apply even if you have not been an active member of the scheme throughout this period.

Where this applies your right to take benefits before age 55 on or after 6th April 2010 will be honoured provided that you take all your pension and lump sum benefits at the same time; and before, or immediately on taking benefits under the scheme you leave the employment to which your benefits relate.

If your protected pension age is between 50 and 55 there will not be any reduction to your lifetime allowance but if it is less than 50 and you draw benefits before age 50, your lifetime allowance must be reduced by 2.5% for each complete year that benefits are taken before the NMPA unless:-

-the pension is paid because you are retiring due to ill-health; or
-you are a member of the armed forces, police or fire service pension schemes.

Your lifetime allowance is the total pension value that you are allowed to build up without a charge being incurred and is £1.75m for 2009/10, rising to £1.8m in 2010/11.

  • You are a member of a personal pension and have a particular employment or occupation that is recognised by HMRC as having a low normal retirement age.  An example of the type of occupation that falls into this category is a professional sports person.

The earlier normal pension age will be honoured provided you joined the scheme prior to April 2006 and you take all of your benefits from the relevant scheme in full.

If your protected pension age under a personal pension is less than 50 and you take your benefits before age 50 (other than on the grounds of ill-health), your lifetime allowance would be reduced by 2.5% for each complete year you take benefits before the NMPA.

Care should always be taken if you are a member of an occupational scheme or personal pension with a protected pension age, and are considering transferring your pension to another provider, as the protection may then be lost.  It is important that you seek advice before any action is taken.

There is one advantage to having a scheme with a protected pension age, in that benefits can be transferred into that scheme and be taken from the lower age, even if the scheme from which the benefits have been transferred has a normal minimum pension age.

In the unfortunate event that you are diagnosed as being in serious ill-health, you can access all your uncrystallised pension rights as a lump sum, and this will be tax-free as long as it is within your unused lifetime allowance.

  • Regardless of whether you hold benefits under a personal pension or occupational scheme or whether the scheme in question has a protected pension age, you may be able to access your benefits before the NMPA without suffering any reduction to your lifetime allowance if you are in ill-health.

However, in order to do so, the scheme administrator must have received evidence from a registered medical practitioner that you are (and will continue to be) incapable of carrying on your occupation because of physical or mental impairment. You must also have ceased to carry on your occupation.

  • In order to receive a ‘serious ill-health lump sum’ the scheme administrator must have received evidence from a registered medical practitioner that you have been diagnosed as having less than 12 months to live.

But for people who do not fall into one of the above categories, what could be the potential impact of the rise to age 55?

The most obvious impact is that you may have to delay retiring by five years as instead of being able to draw your pension at age 50, you will have to wait until age 55.  The people who could be particularly hit by this are those currently approaching 50 who are thinking of retiring and taking their pension.  This would only apply however, if you had built up sufficient savings to be able to retire at such an early age – an aspiration for many, but probably a reality for only a few!

There could however, be a number of people, who have utilised a pension mortgage with a repayment date in their early to mid 50s with the repayment date falling after 6th April 2010.  For these the change in rules could result in a delay in repayment and higher interest costs.  It is important for anyone in this category to seek advice as soon as possible.

A further impact will be on anyone aged between 50 and 55, who are phasing in the taking of their pension benefits.  If part of their pension has already been accessed, but the person is aged below 55 on 6th April 2010, they will be able to carry on taking existing benefits from their pension, but will not be able to take any additional benefits until they reach the age of 55. This could be detrimental if an increase in the pension income is being relied upon, and could result in other monies having to be used to provide the ‘missing’ additional income.

There could also be an impact on the amount being saved into pensions, given that it will not be possible to access the money for a further five years.  This may result in people seeking other types of plans, for example, an Individual Savings Account.
This would provide a tax-efficient environment with access available at any age, without tax being payable on the withdrawals.  However, unlike a pension, tax relief would not be received on the contributions into the plan.  The value of investments can fall as well as rise and you may not get back the full amount invested.

If you feel you may be affected by the change in the normal minimum pension age you should seek advice at the earliest opportunity.

  • Regardless of whether you hold benefits under a personal pension or occupational scheme or whether the scheme in question has a protected pension age, you may be able to access your benefits before the NMPA without suffering any reduction to your lifetime allowance if you are in ill-health.

However, in order to do so, the scheme administrator must have received evidence from a registered medical practitioner that you are (and will continue to be) incapable of carrying on your occupation because of physical or mental impairment. You must also have ceased to carry on your occupation.