Normal pension age draft legislation branded ‘hugely complex mess’

Jenna Brown reports

Draft legislation confirming the increase to normal pension age – from 55 to 57 in April 2028 – has been issued by HM Revenue & Customs (HMRC) and branded a “hugely complex mess” by one pension expert.

If followed a consultation that ran from February to April which garnered received 142 responses. 

The new rules mean the normal minimum pension age will increase from 55 to 57 in 2028 in line with the increase in state pension age to 67.

Members of ‘uniformed pensions schemes’ such as the armed forces and police and fire services will still be able to take benefits from 55.

The rules state a member of a registered pension scheme who on 5 April 2023 has a right to take benefits from an earlier age than 57 and the rules of the scheme on 11 February 2021 (the date of the original consultation) gave a right to take benefits at an earlier age, “can retain the right to take benefits at age 55”.

They add that right to take benefits at an earlier age is retained on a ‘block transfer’ – broadly speaking a block transfer is where two or more people transfer from the same transferring scheme to the same destination scheme at the same time, according to provider Canada Life.

Technical director Andrew Tully said advisers would welcome confirmation of the timing but the legislation had evolved into a “complex mess”.

He explained: “The confirmation of the timing of the increase in the normal minimum pension age will be welcome to individuals and advisers and give time for appropriate planning over the next seven years.

“However, what should have been a simple process has turned into a hugely complex mess.

“The process to decide which individuals retain a right to an earlier pension age is completely arbitrary, being based on the specific wording within scheme rules, which may have been written many years ago.”

He added: “It also leaves open the possibility that people will hunt around for a scheme which gives them the right to take benefits at age 55 and transfer to that before 2023. So expect frantic transfer activity over the next few years as people look to secure age 55 as their minimum pension age, irrespective of their birth date.”

Tully said he was “disappointed” to see existing ‘block transfer’ rules would continue.

“These rules are complex and can effectively stop individuals transferring to a more modern, flexible, cheaper contract simply because they want to hang onto this right to take benefits at age 55.

“The legislation as drafted adds further hideous complexity to the pension system, which might be fine for pension geeks like me but for the average pension saver will prove nigh on impossible to navigate successfully without the help of a professional adviser.”

Quilter head of retirement policy Jon Greer said: “One of the biggest issues with the initial consultation back in February was that it contained a number of inconsistencies. None bigger than the fact scheme members would have been able to retain their protected pension age for block transfers, but for not individual transfers. The government’s concession to allow both block and individual transfers will therefore remove one inconsistency, and on the face of it may remove the jeopardy associated with losing the earlier retirement age.

“It’s certainly a positive that the government has listened to feedback and said it will provide details of proposed transitional protections soon, but the details of this regime will be crucial. This regime could have a material impact on members decision to transfer, and also on the complexity of administration for pension schemes and ease of communication to members.”

He added: “Any rules that don’t quite work the way they do today will add additional complexity to the retirement planning landscape which members will have to get their head around. Will scheme members understand a transitional arrangement for a protection regime?

“While good-natured in the approach, given the added complexity of these new regimes, we may well still ask whether the increase in the NMPA is really worth it.

“The idea behind increasing the NMPA is to stop people running out of money. But looking at the data, most people taking their pension benefits ‘early’ just cash in their pot.

“According to the latest retirement income data from the FCA, 55% of pension plans accessed for the first time are withdrawn fully overall, with 75% of those withdrawals done by people aged 55-64. Adding an extra two years to the minimum age they can access their pension pot isn’t going to change behaviour and will do very little for improving retirement prosperity.”