Summary and implications
At the moment, the earliest age from which most pension scheme benefits can be drawn without attracting tax penalties is 50. This is referred to in the Finance Act 2004 as the normal minimum pension age (NMPA). On 6 April 2010 the NMPA will rise from 50 to 55. In effect this means that most pension scheme members will not be able to take early retirement benefits before age 55. Those in ill-health may draw benefits earlier and some scheme members may retain pre-Finance Act rights to take benefits before age 55 (this is known as the 'protected pension age'). Scheme trustees and administrators need to ensure that they are ready for this change.
The key areas to be addressed are:
- The minimum age from which most scheme members can draw benefits will increase from 50 to 55 on 6 April 2010.
- Trustees or scheme administrators may want to take steps to bring the change to the attention of those members most likely to be affected. This will be those aged 50-54 on 6 April 2010.
- Trustees should check their scheme documents and administration arrangements to establish precisely when members' entitlements arise and what can be done to meet requests for payments of pension before 6 April 2010.
Identifying the minimum age at which authorised payments can be made: many schemes will have more than one
The NMPA for all pension scheme members will rise to 55 on and from 6 April 2009. The NMPA is not necessarily the age at which members have an absolute right to draw benefits but is the minimum age from which schemes may allow benefits to be taken without them being unauthorised and attracting tax charges (unless a member has a protected pension age or is in ill-health).
Some scheme members may have a protected pension age lower than 55 (and indeed lower then the previous NMPA of 50 for those in certain occupations). The protected pension age may be different for active and deferred members. Those members will continue to be able to rely on their protected age from 6 April 2010 and draw a pension before age 55, despite the change in NMPA. This is a very complex area and detailed advice may be required to identify protected pension ages of individual scheme members.
Members age 50-54 on 5 April 2010: time to take action
Trustees of schemes where members can draw benefits (whether by right or with consent) from an age below 55 need to consider informing all members who will be aged between 50 and 54 on 5 April 2010 that they may wish to apply for their benefits. Members must have "taken their benefits" before 6 April 2010 for them to qualify as an authorised payment under the current NMPA of 50 (and thus avoid tax penalties under the Finance Act 2004). HMRC has issued guidance confirming that this means that arrangements for the benefits must have been finalised (e.g. an annuity has been purchased or all the paperwork completed in order for a benefit to be paid from the scheme), not necessarily that payments have actually been received by the member. HMRC confirms that if arrangements for a particular pension are finalised before 6 April 2010, then the normal minimum pension age for that pension in effect gets 'frozen' at 50.
HMRC has introduced a relaxation for those whose 50th birthday falls between 2 and 5 April 2010 (the Easter Bank Holiday weekend) who wish to take a pension from their scheme from age 50. Where arrangements are in place for such pensions on 6 April 2010, members will be treated as if they had "taken their benefits" on their actual birthday. This means that those members who are able under their scheme rules to take benefits from age 50 will still be able to do so despite the long weekend. Those members with protected pension ages may not be affected by the change in practice as they can still draw their benefits before age 55 - but may now have to rely on proving their protected pension age (rather than just relying on the NMPA) if they wish to take a pension after 6 April 2010.
HMRC guidance on the increase in NMPA can be found here
HMRC Newsletter 38 with more detail on "freezing" the NMPA can be found here
Members under 55 already in receipt of a pension: no change for existing benefits
Members aged under 55 with pensions already in payment as at 6 April 2010 will continue to receive their regular pensions as authorised payments. Ordinary annual increases may also be made to those pensions. Should excessive increases in future be made (very broadly any increase in excess of RPI capped at 5%) then this will be treated as a new benefit entitlement and, if the member is under 55 at the time of the increase, the increase may be unauthorised.
Members aged under 55 who have brought only part of their benefits into payment before 6 April 2010 will be subject to the new NMPA when their entitlement to any further benefits arises in future. This means they will not be able to bring any further tranches of benefit into payment until they reach age 55.
Practical issues: time to take action
Trustees should consider the following:
- Check scheme documents to establish precisely when members' entitlements arise and what is possible in terms of meeting requests for the payment of pensions before 6 April 2010.
- Consideration should be given to informing individually those aged 50-54 who will be directly affected by the change
- Consideration should be given to informing individually those aged 50-54 who will be directly affected by the change.
- Administration systems will need to be reviewed to ensure that no unintended unauthorised payments are made due to the increase in NMPA.
- Membership data should be checked to make sure it is complete and accurate. Any protected pension ages should be noted on the member's record.
- All members should be informed of the change in NMPA in advance. Appropriate changes should be made to scheme booklets.
- Governing documentation should be checked for any references to taking benefits before age 55. It may not strictly be necessary to make express amendments changing age 50 to 55 (as payments below NMPA may be restricted by a rule preventing unauthorised payments) but is recommended for the sake of clarity.
Click here for 'Identifying a protected pension age'