From 6 April 2028, the normal minimum pension age (NMPA) will increase from 55 to 57.
While some pension schemes will protect beneficiaries from this change, the benefit can be lost if clients transfer their pension.
This legislative shift could also catch people off guard due to an unusual loophole. Here, we explore the nuances of the upcoming change, who might be impacted and how to safeguard retirement plans.
Under the current legislation, some individuals will be able to access their pension at age 55 but then be locked out again because they won’t be 57 when the new rules take effect. This anomaly could impact over one million people.
Someone born on 5 April 1973 will have precisely 24 hours to enjoy their pension before it closes for another two years
Understanding this loophole is essential for those born between 6 April 1971 and 5 April 1973, as they fall into this transitional phase.
Until 5 April 2028, most people can access their pension from age 55. However, from 6 April 2028, the minimum pension age rises to 57 with no transitional arrangement.
If clients are not 57 on that date, they generally won’t be able to access their pension, even if they were able to do so before. For instance, someone born on 5 April 1973 will have precisely 24 hours to enjoy their pension before it closes for another two years.
Clients impacted by this should consider using a pension provider known for their speedy customer service.
The Treasury acknowledged this problem in a July 2021 paper, however no advice has been published
The Treasury acknowledged this problem in a July 2021 paper stating, “The government will provide further advice on the proposed transitional arrangements and provisions in due course”.
However, no such advice has been published. The change in the NMPA was solidified by the Finance Act 2022.
If clients are affected by this glitch, they might consider withdrawing enough cash from their pension to cover the period when it is locked again.
For instance, someone born on 5 April 1973 would need to withdraw an extra two years of cash to cover the tax years 2028-29 and 2029-30.
If clients are affected by this glitch, they might consider withdrawing enough cash from their pension to cover the period when it is locked again
This could mean a significant tax hit unless you use your tax-free cash. Using phased drawdown to take the tax-free cash without overwhelming a client’s Isa allowance is one strategy, but it’s essential to understand the tax implications.
A crucial aspect of personal planning is evaluating the different strategies available to mitigate the impact of this change.
Clients might consider a phased approach to withdrawing their pension, which involves taking tax-free cash in stages rather than in a lump sum. This method can help manage tax liabilities more effectively and ensure they have enough funds available during the transition period.
Another option is to review the entire retirement portfolio and consider reallocating assets to provide more liquidity during the affected years. This might involve increasing savings in Isas or other tax-efficient vehicles to bridge the gap until they can access your pension again.
Clients can lose their PPA if they transfer their pension to a new provider that doesn’t honour the protection
Some pensions can still be accessed at age 55, even after the NMPA rise. This protected pension age (PPA) applies if the scheme granted the right to take benefits at 55 under its rules on 11 February 2021 and were a member before 4 November 2021. It’s best to check directly with scheme administrators.
Clients can lose their PPA if they transfer their pension to a new provider that doesn’t honour the protection.
However, if clients arrange a block transfer (involving two or more members transferring to the same new scheme at the same time), their past and future contributions might still qualify for the PPA, even if the new scheme doesn’t offer this protection.
A block transfer can be a viable solution for maintaining PPA benefits. This process involves transferring their pension along with at least one other member to a new scheme simultaneously.
The anomaly could impact over one million people
The key advantage is the entire pension pot, including future contributions, will retain the PPA status, allowing clients to access their pension at 55 despite the NMPA increase.
Steps for a successful block transfer
- Identify potential schemes: Research and identify new pension schemes that allow block transfers and can meet retirement needs.
- Coordinate with other members: Have at least one other member willing to transfer their pension at the same time.
- Consult: Seek advice from pension scheme administrators to understand the implications and process.
- Initiate the transfer: Work with current and new pension providers to facilitate the block transfer and ensure all necessary paperwork is completed.
The upcoming change in the NMPA presents a complex landscape for many pension holders. If clients are affected, it’s crucial for them to understand their rights and options.
Aaron McAuley is a paraplanner at GSB Wealth
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