Under the Finance Act 2004 (FA 2004), provision is made for the normal minimum pension age (NMPA) at which benefits may be taken from a registered pension scheme to increase from age 50 to age 55 on and from 6 April 2010 (the Effective Date). This means that, from the Effective Date, members of most occupational pension schemes will be unable to take early retirement benefits before age 55 without attracting an unauthorised payments charge, unless they fall within one of the exceptions.


The exceptions apply in the following cases:

  • The member started receiving payment of his pension scheme benefits before the Effective Date, having reached age 50 before it. Therefore, anyone who was entitled under the scheme rules before the Effective Date to a normal retirement age of 50, who will be aged between 50 and 55 on the Effective Date and who wishes to take an early retirement pension before age 55, must have started taking those benefits before 6 April 2010
  • The member retires early due to ill health or incapacity. The scheme must have received evidence from a registered medical practitioner that the member is incapable of continuing in his occupation because of physical or mental impairment and the member must have stopped working in that occupation.
  • The member has a protected pension age. The protected pension age is the age at which the member had the right to take a pension on 5 April 2006, subject to the following conditions imposed by HM Revenue & Customs (HMRC):
  • the member must have had a right on 5 April 2006 (the last day before the FA 2004 changes came into effect), that is with no consent required, to take an early retirement pension at a minimum age between 50 and 54;
  • the early retirement provision must have been included in the scheme’s governing documentation on 10 December 2003 (when the Government first announced the proposed changes); and
  • the member must have had the right under the scheme rules to take the benefit before age 55 on 10 December 2003. Alternatively, if he joined the scheme after that date, he must have acquired the right under the scheme provisions as they stood at that date.

In our pensions updates for November 2009, December 2009 and January 2010 we published reminders of this deadline and also provided links to guidance on the interpretation of the relevant rules published by HMRC.

Actions for trustees

By now, trustees and employers of affected schemes should have raised their scheme’s NMPA to 55 in advance of the Effective Date, and should have communicated with members to remind them of this forthcoming change in order to start the required administration processes where necessary for members who can still retire at age 50 before the Effective Date. Most scheme members will have been informed of this change at the time announcements were sent to them concerning the various amendments made to their scheme rules under the new tax regime on A-Day, that is, 6 April 2006. Early communication to members is important as it is estimated that the entire process could take up to 3 months to complete, especially if members are slow to reach decisions and to return the relevant documents.

Benefit crystallisation events

Under the FA 2004, an individual’s pension fund is tested against the lifetime allowance whenever there is a benefit crystallisation event (BCE). The payment of a scheme pension and the payment of a tax-free lump sum when that pension comes into payment are two of several BCEs listed in the legislation. In this briefing we look in greater detail at the related online guidance provided by HMRC in the Registered Pension Schemes Manual and highlight some of the illustrative examples published in their connected documentation.

What is meant by an unqualified right to take benefits?

A scheme member has an unqualified right to take his pension if he does not require the consent of the trustees or the employer in order to do so. If the scheme rules require the consent of the employer or trustees before a pension may be paid early, the member does not have an unqualified right. It is immaterial if the trustees have always exercised their discretion in favour of allowing early retirement requests.

Some scheme rules give members an unqualified right to take early benefits on meeting certain conditions. If such conditions are met by the individual, that member will have a protected pension age.

Example: On 10 December 2003, the member’s relevant scheme rules provided an unqualified right to take pension benefits before age 55, but only on redundancy. If the member is made redundant after 5 April 2010, aged over 50 but under 55, and exercises his right to take an early retirement pension, the protected pension age means that a tax charge will not arise.

Similarly, for example, as at 10 December 2003, a scheme may not have allowed active members to take an early pension without trustee and/or employer consent, but may have given deferred members an unqualified right to do so. If an employee then left active service and became a deferred member under the provisions of the scheme rules and wished to exercise his right to receive an early pension before age 55, he too would have a protected pension age. No protection would be given to those individuals who are not deferred members, as they have not met the relevant condition giving them an unqualified right to take benefits under the rules.

How does the new NMPA affect members who are receiving benefits before 6 April 2010?

Where a member starts to take benefits after reaching the NMPA of 50 before the Effective Date, but he is not aged 55 by that date, those benefits can continue to be paid after the Effective Date as authorised payments.

Example: a member’s 51st birthday is in August 2009. His pension starts in December 2009, when he is aged 51 and thus above the prevailing NMPA of 50. When the NMPA is raised to 55 in 6 April 2010, the pensioner is still only 51. However, although his pension age is then below the prevailing NMPA of 55, the pension continues as an authorised payment.

What if the same member wishes to crystallise further benefits after the Effective Date?

If the member wishes to crystallise further benefits after 5 April 2010, the member must have reached the NMPA of 55 in order for these to be classified as authorised payments. If the member were to start contributing to another pension on or after 6 April 2010 then, in order to receive benefits from that scheme as authorised payments, he must wait until he is 55 in August 2013 - unless one of the protected pension age or ill-health exceptions applies.

Pension commencement lump sums

Benefits can be taken partly in the form of a tax-free lump sum if benefits are below the lifetime allowance and the individual is below age 75. This form of lump sum, generally under FA 2004 a maximum of 25 per cent of the value of total benefits, is only available when the pension benefits commence and hence is known as a pension commencement lump sum (PCLS). In order for a lump sum to be classed as a PCLS, and therefore to attract the tax exemption, the pension to which it is linked must be one of the authorised types of pension and the PCLS can only be paid when the member has reached NMPA.

The PCLS must be paid within the period starting 6 months before, and ending 12 months after, the day on which the member becomes entitled to the related pension. The pension entitlement date sets the PCLS payment window and, unless certain cases of protection apply, the PCLS cannot be considered in isolation from the pension to which it is linked. Thus HMRC is of the view that the same NMPA must apply to the PCLS and the linked pension. HMRC interprets the legislation so that, at the time of the relevant BCE, the test will be applied to ascertain whether the member is at or over the NMPA at that point. This will determine whether the pension and the lump sum benefit are authorised payments or not.

How does the change affect Pension Commencement Lump Sums?

As we have noted, the tax rules permit both:

  • pre-payment of the lump sum up to 6 months before the PCLS entitlement actually arises (this period may shorten or disappear altogether in some cases, for example where the BCE occurs over the Easter holiday period in 2010 - see below); and
  • post-payment, where the lump sum may be paid up to 12 months after the PCLS entitlement actually arises (the 12 month period never shortens).

In most cases, the NMPA must have been reached at the time of payment. Below, we have set out some examples given by HMRC on the relevant NMPA in different situations.

Example 1: A member whose PCLS entitlement occurs in February 2010 when the NMPA is 50, has the prevailing NMPA requirement for the purposes of payment of the PCLS fixed at 50. That is, the member must be over age 50 when the PCLS is actually paid, e.g. in July 2010.

Example 2: A person whose PCLS entitlement occurs after 6 April 2010, say in May 2010 when the NMPA is 55, will have to be over age 55 when a post-paid PCLS is paid, e.g. in July 2010.

The member needs to have reached age 50 or 55 (whichever applies) at the point of actual payment of the PCLS. If he intends to take benefits on or shortly after his 50th or 55th birthday (as applicable), the 6 month long pre-payment window can be either shortened or it is not available at all.

HMRC sets out further examples in its Pension Schemes Newsletter no. 38 and also in its guidance for individuals.

What is the pension payment date?

As we have noted, the entitlement occurs when the individual first has an actual (as opposed to a prospective) right to the payment of his pension. The entitlement date is the date on which a BCE occurs and is not necessarily the same as the date the first pension instalment is actually paid to the member.

An actual right is when the member has the right to a benefit without having to fulfil any further conditions or take any further actions, such as having to agree to, or authorise the payment of, a benefit, or having to obtain an employer’s, a trustee’s or a scheme administrator’s agreement to the payment of the benefit. Although the term actual right refers to the receipt of actual benefit, rather than merely being in possession of a right to obtain it, it does not necessarily refer to the date a benefit is in fact paid out. The Registered Pension Schemes Manual sets out different examples of entitlement and payment for the different pension categories: unsecured pension; scheme pension; and lifetime annuity.

What about those members who reach age 50 between 2 April 2010 and 5 April 2010 inclusive?

Friday 2 April 2010 is Good Friday and therefore a Bank Holiday. Monday 5 April 2010 is also a Bank Holiday. As the last banking day prior to the Effective Date is Thursday 1 April, HMRC recognises that this may present difficulties for some members who reach age 50 on any day from 2 April 2010 to 5 April 2010 inclusive. It is possible for a BCE to arise on these days, for example, in relation to a scheme pension, but in many cases this will not be possible. HMRC’s intention is not to deny those who reach age 50 on any of these four days the ability to access their benefits should they wish to. For these individuals, HMRC will accept that if the BCE occurs on the Effective Date as a result of the Bank Holidays, they will treat it as occurring on the member’s actual 50th birthday. This means the member’s pension entitlement arises when NMPA is 50 and any PCLS can be paid out over the following 12 months. There is no pre-payment period for the PCLS in these cases as the relevant BCE arises on the member’s 50th birthday.


At first blush this seems to be a relatively straightforward concept, but as can be seen from the examples given by HMRC, complexities can and will arise, particularly in connection with the PCLS.

HMRC is available to assist in relation to queries on any of the above points. Scheme trustees or individuals may contact HMRC by email at the link in Pension Schemes Newsletter no. 38, on the helpline telephone number 0845 600 2622, or by writing to Pension Scheme Services, Fitzroy House, Castle Meadow Road, Nottingham, NG2 1BD.