Protected Pension Age
14th October, 2021
The government has recently set out its proposals for increasing the Minimum Pension Age from 55 to 57, effective in 2028 when the State Pension Age will be increased to 67 for all.
The Minimum Pension Age is the earliest age at which a scheme member may access retirement benefits without a tax penalty.
What went before?
This will be the second time the government has taken such a measure. The Minimum Pension Age increased from 50 to 55 on 5 April 2010. The Minimum Pension Age set in legislation applies to all pension schemes, but some schemes have an earlier age “hardwired” into their scheme rules. The earlier age is known as the “Protected Pension Age” and applies instead of the increased statutory Minimum Pension Age.
For a Protected Pension Age to be hardwired into the scheme rules:
- a member must have had the right on 5 April 2006 to take a pension and or a lump sum at a minimum age from 50 to 54;
- that right must have been unqualified (in that no other party need consent to the member’s request for such a pension);
- the provision in question must have been set out in the scheme’s governing documentation on 10 December 2003 (the date of the initial consultation about increasing the Minimum Pension Age); and
- the member must have had the relevant right on that date.
Importantly, complex provisions in the Finance Act 2004 enabled scheme members with a Protected Pension Age to keep that Protected Pension Age when bulk transferring from one scheme to another in appropriate circumstances, whether once or multiple times. Benefits accrued subsequent to such a transfer also benefited from the Protected Pension Age. Individual transfers after 6 April 2015 (reflecting “pensions freedoms”) maintained a Protected Pension Age but only in respect of the transferred benefits, which therefore had to be ring-fenced from accruals not benefitting from a Protected Pension Age, and there was no provision for maintaining the Protected Pension Age on subsequent transfers.
Scheme members with a hardwired Protected Pension Age of less than 55 will keep it in 2028 and will not be affected by the increase in the Minimum Pension Age from 55 to 57 in that year.
What is happening now?
The government is proposing to protect scheme members who did not previously have a Protected Pension Age, effectively setting out a Protected Pension Age mark two, hardwired between ages 55 and 57.
Once again, for a new Protected Pension Age to be hardwired,
- a member must have an actual or prospective right on 5 April 2023 to take any benefit from an age of less than 57;
- the rules of the scheme on 11 February 2021 (again the date of the initial consultation) included the provision conferring such a right on some or all of the persons who were then members of the pension scheme; and
- the right either was then conferred on the member or would have been had the member been a member of the scheme on that date.
Similar provisions will apply concerning transfers of benefits to which a new Protected Pension Age applies.
The explanatory notes issued with the draft legislation that accompanied the consultation state clearly that there is an intention to open a window of opportunity for members who are not currently eligible for a Protected Pension Age to become eligible between now and 5 April 2023, by transferring from a scheme which did not provide the relevant right in its rules on 11 February 2021 to a scheme that did provide that right on that date and confers it on new members. The transfer must be completed before 5 April 2023 as that is the date set for eligibility. The new Protected Pension Age will nevertheless only become effective in 2028, so members will have to wait until then to secure the desired Protected Pension Age and hope nothing intervenes to frustrate that expectation.
What is the problem?
Clearly, the window of opportunity may present an incentive for members to transfer from one scheme which will not confer a new Protected Pension Age to another which will. Such an incentive may give scammers a lure to entice victims into an improper transfer.
Besides the scam risk, the complexity of the entitlement rules may give rise to a significant amount of members checking whether their scheme does or does not offer the potential of a Protected Pension Age, with the possibility of burdensome requests for scheme documents and explanations (which must not cause trustees or managers to give regulated financial advice), and the possibility of increased transfer requests and eventual disputes should these transfers not give the desired outcome.
Trustees and managers may find it useful to anticipate problems by communicating with members in relation to Protected Pension Age – and employers should take an interest.
Scheme rules may have been amended to give effect to the previous changes, in or around 2010, by changing references to an express age (e.g. replacing mentions of “50” with “55”), or by replacing references to an express age to references to the statutory minimum pension age as effective from time to time. The former may have the potential of providing a Protected Pension Age, whereas the latter may not. Further, all depends on whether the member’s right to retire at the stated age is unqualified or whether it is subject to the consent of trustees, employer, or both, or is subject to conditions. Only an expressly unqualified right will have the potential of providing a Protected Pension Age, but there may be situations where custom and practice may add complexity.
Members may or may not know they already have a Protected Pension Age, whether under their existing scheme or as a result of transfers in, and preparation for a communication exercise could reveal situations where schemes have been incorrectly administered in relation to a proportion of the membership. Communicating this issue could give rise to disputes and benefit corrections, especially if transfers-in or payment of pensions had been mishandled.
A communication exercise in Protected Pension Age could affect participation in a workplace pension if it does not have the potential for a Protected Pension Age. It could also affect plans for the consolidation of workplace pensions or even the funding of defined benefit schemes if there is a sudden interest in transfers or in retirement at a Protected Pensions Age members were previously unaware of.
Trustees of pension schemes ought to at least check their rules regarding this issue (and employers should take an interest), before considering a communication exercise with members to forestall any increase in requests for clarifications.
For further information, please get in touch.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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