With effect from 6 April 2010, the earliest age at which any individual will be able to take their pension from a registered pension scheme (except in cases of ill-health) will be increased from age 50 to age 55. Where a pension/lump sum is paid out to a member who is below the minimum pension age, it will be an unauthorised payment and will be liable to a tax charge of 40% and potentially a scheme sanction charge of a further 15%.
However, transitional provisions apply to protect certain categories of members (broadly, members who had a right (including a prospective right) to take pension at ages 50 to 54 on 5 April 2006 – although this is subject to certain caveats which are explained more fully below).
The basic position
As noted above, the current minimum pension age of 50 will increase to age 55 with effect from 6 April this year. This will not affect the payment of ill-health pensions or where benefits are commuted on the grounds of serious ill-health; and those who have started to take an early retirement pension before that date, but who are aged between 50 and 54, will be able to continue to draw that pension in the normal way.
The other category of member unaffected by the change consists of individuals who have a "protected pension age".
Who has a protected pension age?
Broadly, those who had an unqualified right to take a pension and/or a lump sum at age 50 to 54 on 5 April 2006 will have a protected pension age if all of the following conditions are met:
- Their right to their pension/lump sum was unqualified (that is, not subject to employer or trustee consent).
- According to the HMRC Manual, it is irrelevant if, for example, trustees have always exercised their discretion so as to grant a pension – the right is not unqualified and the member would not have a protected pension age.
- "Unqualified" does not mean the same as "unconditional". HMRC confirm that, where a member has to meet certain conditions in order to receive the early pension at ages 50 to 54, that early pension will be an authorised payment if the member meets those conditions (for example, redundancy).
- It is possible for certain categories of member to have an unqualified right, but for others to have a qualified right (with the latter, therefore, not having a protected pension age).
- The right must have been set out in the scheme's governing documentation on 10 December 2003 (the date on which the proposal to increase the minimum pension age was announced).
- The member must have had the right under the scheme on 10 December 2003 or acquired the right under the scheme's provisions as they were on 10 December 2003 on joining the scheme after that date.
- All benefits must crystallise at the same time.
This transitional protection will survive a block transfer (broadly, where two or more members of one pension scheme transfer their benefits to the same receiving scheme at the same time and neither member was a member of the receiving scheme for more than 12 months before the transfer). The member will lose his or her right to a protected pension age on an individual transfer of benefits.
In very broad terms, where a member's entitlement to a protected pension age arises from membership of a scheme before 6 April 2006, protection will be lost where the member has a protected pension age of between age 50 and 54 and takes his or her benefits, but continues to be employed by one of the scheme's sponsoring employers (or by an employer connected to them). This employment restriction only applies where the entitlement arises after 5 April 2010; it does not apply where the entitlement to benefits was already in existence on that date.
A couple of practical issues:
- What if a member aged 50 to 54 already in receipt of an early retirement pension wishes to crystallise further benefits? The member must have reached the new minimum pension age of 55 for any further benefits to be authorised payments.
- Impact of the Easter holidays. HMRC notes that members who turn 50 on any of the days from 2 to 5 April may be unable to trigger a benefit crystallisation event because of business restrictions over the Easter bank holiday period. HMRC will treat the benefit crystallisation event in relation to these members as occurring on their 50th birthday.
What does this mean in practice for employers and trustees?
Many employers and trustees will have informed members of the change already, but they may also wish to consider undertaking a communications exercise (even if it is only a reminder) with members who are at present aged between 50 and 55 and who stand to lose their right to take an immediate early retirement pension on 6 April.
Employers and trustees may also wish to turn their attention now to the identification of protected members, so that future pensions administration runs smoothly.
Pension scheme rules and booklets may have to be amended to reflect the new minimum pension age.