Pension schemes need to act on retirement age changes now
The Finance Act 2004 provides for the minimum age at which benefits may be taken from a registered pension arrangement to increase from 50 to 55 next April. At the same time, the phasing in of equal pension ages for men and women begins.
On this page:
New normal minimum pension
age
Low normal pension ages
Complicated rules
Scheme
actions
State pension equalisation
Box 1: Examples of unqualified rights to take benefits
early
Box 2: Examples of state pension ages for women
born on or after 6 April 1950 and before 6 April 1959
Our
research.
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Key points
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A recent press release issued by Aon Consulting is headed "Retirement age changes - a shock for UK workforce?". Based on responses to a survey from more than 4,000 people, Aon states that less than a quarter of workers are aware that from April 2010 the minimum age for receiving a pension from a registered pension arrangement is increasing from 50 to 55. The survey also finds that only 46% of individuals are aware that the "state pension age for women is rising to 65 in 2010". Although this latter statement is not strictly accurate, as the female state pension age will not be 65 until 2020, the findings of the survey illustrate a worrying lack of knowledge about these changes.
Part of the reason for this could be the passage of time since the legislation for these changes was passed. The increase in the normal minimum pension age was included in the Finance Act 2004, but, unlike the pension tax simplification measures in the statute, which took effect in April 2006, does not apply until 6 April 2010. The equalisation of the state pension age for women, which is being phased in over 10 years commencing on the same date, was introduced by the Pensions Act 1995 and seems to have received relatively little publicity since that time.
Here, we provide a reminder of the provisions and highlight areas for action by schemes and employers.
New normal minimum pension age
The rationale for increasing the normal minimum pension age seems to be to encourage individuals to stay in work for longer. From 6 April 2010, benefit payments made to members who retire after that date aged less than 55 will attract a tax charge unless they fall within one of the exceptions to the rule. There are no transitional provisions as such. The exceptions are:
- the member started taking payment of the benefits prior to 6 April 2010 having reached the age of 50 before that date;
- the pension scheme member retires early because of ill health or incapacity; or
- the member has a "protected pension age".
The first exception means that anyone who currently has a normal minimum 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 needs to ensure that the benefit crystallises before 6 April 2010.
HM Revenue & Customs (HMRC) specifies that before a member can take an ill-health early retirement pension, the scheme must receive evidence from a registered medical practitioner that the member is incapable of carrying on his or her occupation because of physical or mental impairment. In addition, the member must have ceased working in that occupation.
A member's "protected pension age" is the age at which the member had the right to take pension on 5 April 2006. HMRC lays down certain conditions that must be met for pension ages to be protected, which are:
- the member must have had an unqualified right (which means that no consent is required to the individual's request before it becomes binding on the pension provider) on 5 April 2006 to take a pension benefit at a minimum age between 50 and 54;
- the provision to pay benefits before age 55 must have been set out in the scheme's governing documentation on 10 December 2003; and
- the member must either have had the right under the scheme to take the benefit before age 55 on 10 December 2003 or, if joining the scheme after that date, acquired the right in accordance with the scheme provisions as they were on that date.
Box 1 contains some HMRC examples illustrating how these conditions may be met.
Low normal pension ages
Members of certain registered pension schemes and individuals following specified occupations may also have a right to take benefits before the normal minimum pension age if they have an existing right to a normal retirement age of less than 50. The schemes and occupations concerned are prescribed in Regulations1. The pension schemes concerned are mainly for members of the armed forces, the police service and firefighters. The occupations that are permitted to have low retirement ages include a wide range of sporting activities, together with such diverse professions as divers and trapeze artists.
In order for individuals to qualify for benefits under the low normal-retirement-age rules, the same conditions have to be met as for protected pension ages. Consequently, an individual must have had the right on 5 April 2006; it had to be unqualified; and it had to be documented by 10 December 2003.
Where individuals are in a prescribed occupation with a normal retirement age of less than 50, their lifetime allowance is reduced by 2.5% for each complete year between the date of the benefit crystallisation event and the normal pension age applicable on that date. This proviso does not apply to members of the prescribed pension schemes or to individuals who take ill-health early retirement.
Complicated rules
If an individual whose pension age is not protected takes any of their benefits before normal minimum pension age, each payment made until the member reaches age 55 will be treated as an unauthorised payment and subject to a penalty tax charge of 40% of the unauthorised amount.
However, even individuals with protected pension ages have to take care not to attract an unauthorised payment charge, particularly where the benefit entitlement arises after 5 April 2010 but before the individual attains age 55. They may lose their protection if (1) they return to work with employers (or individuals) connected to the scheme paying the benefits or (2) they are connected to the employer unless they meet certain re-employment conditions. These are:
- they are recalled by the armed forces;
- there is a break in employment of at least six months;
- there is a break in employment of a least one month and a probability of their benefits being abated (reduced) as a result of re-employment; or
- there is a break in employment of at least one month and re-employment is materially different.
In addition, where a member with a protected pension age takes the benefit before age 55, they must become entitled to all of their pension and lump-sum rights on the same day, unless they are retiring on ill-health grounds. HMRC gives the example of an individual with some benefits covered by the protected pension age and others that become payable after he or she reaches age 55. If the member does not want to attract a tax penalty, all the benefits have to crystallise at the same time.
When the rules were first introduced there was some confusion about the position of members whose benefits commence to be paid after age 50 but before 6 April 2010, and who have not attained the age of 55 by that date. HMRC has now confirmed that these benefits can continue to be treated as authorised payments after April 2010. However, if these members wish to crystallise further benefits, they must wait until they are 55 before doing so.
Scheme actions
Many schemes will have amended their rules to reflect these changes at the same time as they documented the A-day changes. However, a number of consultants have pointed out that with the passage of time their impact may have been overlooked. Actuarial consultancy Lane Clark & Peacock reminds schemes that rules and member communications must be updated. In particular, it stresses that employers need to review their redundancy policies to ensure that benefits continue to be delivered in a tax-efficient manner.
Pension consultancy Mercer points out that the change in the minimum pension age impacts all areas of pension schemes, including administration, documentation, and communication, and gives rise to actuarial and accountancy issues. It also highlights potential problems surrounding redundancy exercises that may be taking place around the date of the change. Some organisations may bring these forward to allow people between the ages of 50 and 55 to go early, whereas others may deliberately delay them to restrict employees' early retirement options.
State pension equalisation
The increase in the state pension age for women was introduced so long ago and with so little publicity that it is unsurprising that there is a low level of awareness of the change. The Department for Work and Pensions is gradually writing to all women concerned but is not intending to complete the exercise until 2012 at the earliest.
The measure affects women born after 5 April 1950 and is being phased in over a 10-year period. This results in the state pension age for women increasing by one month every two months. Hence a woman born on 5 May 1950 will reach state pension age on 6 May 2010 but a woman born the next day will have to wait until she is 60 years and two months old to receive her pension. Box 2 on the previous page gives examples of the state pension date for women born between 1950 and 1959.
John Wilson of HSBC Actuaries and Consultants Ltd draws attention to the possible implications for pension schemes of this change. One is that, where schemes provide bridging pensions for men retiring between 60 and 65, they will have to cease and an appropriate cessation date will have to be determined. In addition, he mentions that administration procedures for contracted-out schemes will be changing. Furthermore, because schemes that contracted out on a salary-related basis before 6 April 1997 still have to pay a guaranteed minimum pension to women at age 60, the application of pension increases is affected by the changing state pension age. Finally, communication material will need to be updated to refer to the revised state pension age.
1 Registered Pension Schemes (Prescribed Schemes and Occupations) Regulations 2005 (SI 2005/3451), available from the OPSI website.
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Box 1: Examples of unqualified rights to take benefits early
Source: Based on technical guidance page RPSM03106025, published by HMRC. |
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Box 2: Examples of state pension ages for women born on or after 6 April 1950 and before 6 April 1959 | |
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Date of birth |
Date will reach state pension age |
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6 April 1950 to 5 May 1950 |
6 May 2010 |
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6 October 1950 to 5 November 1950 |
6 May 2011 |
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6 April 1951 to 5 May 1951 |
6 May 2012 |
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6 October 1951 to 5 November 1951 |
6 May 2013 |
|
6 April 1952 to 5 May 1952 |
6 May 2014 |
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6 October 1952 to 5 November 1952 |
6 May 2015 |
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6 April 1953 to 5 May 1953 |
6 May 2016 |
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6 October 1953 to 5 November 1953 |
6 May 2017 |
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6 April 1954 to 5 May 1954 |
6 May 2018 |
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6 October 1954 to 5 November 1954 |
6 May 2019 |
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6 April 1055 to 5 April 1959 |
65th birthday |
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Note: The state pension for women born on or after 6 April 1959 will increase in line with the male state pension age until it becomes 68 in 2047. Source: "Pensions for Women", published by the Pension Service. | |
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Our research This feature is based primarily on the sections of the HMRC's Registered Pension Schemes Manual covering pension ages and the Pension Service's booklet, Pensions for Women. We also referred to information published by a number of consultancy firms, notably HSBC Actuaries and Consultants Ltd, Lane Clark & Peacock and Mercer.
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