Rise in pension access age to 57 could leave savers in limbo

For 16 years pension savers have been used to thinking of 55 as the age when they can access their private pension savings for the first time, without facing a tax penalty. That’s all about to change when the Normal Minimum Pension Age (NMPA) rises to 57 on 6 April 2028. 

Gary Smith, Partner in Financial Planning and retirement specialist at wealth management firm Evelyn Partners, comments:

‘This seemingly straightforward rule change could catch out thousands of unsuspecting pension savers. Many face a cliff-edge, where their ability to access their pension is suddenly put back for up to two years.

‘Pension holders who turned 55 before the start of this financial year will be unaffected as their access age is unchanged. At the other end, for the majority of younger savers, there is no decision to be made but it will clearly delay the point at which they can access their pension. A two-year cohort in the middle, however, have an option to retain access to funds that otherwise will be delayed.

‘All savers in their early fifties need to be aware of how their age might mean they need to rethink retirement plans because their access to pension funds is either compromised or delayed.

‘The headline messages are that, first, those of a certain age (who turn(ed) 55 between 6 April 2026 and 5 April 2028) who want to avoid the impact of the NMPA rise and retain flexible access to their pensions might want to crystallise pension arrangements prior to 6 April 2028.

‘Second, some savers with a definite retirement date in mind might need have other funding arrangements in place - such as ISAs, investments or other sources of income - to act as a bridging income until they can access their pensions. Or consider delaying retirement.

‘Third, people must find out if their pensions have a protected retirement age. Many defined benefit and even some defined contribution schemes confer this and other benefits so it is best to take advice before consolidating or transferring.’

What the NMPA is and why it is increasing

The NMPA is the earliest age at which a member of a registered UK pension scheme can normally take pension benefits without those payments being treated as ‘unauthorised’ and subject to tax penalties. The NMPA was most recently increased during April 2010, when the minimum age increased from 50 to 55.

Gary says: ‘It is a tax law that applies to the majority of private (i.e., personal or workplace) pension schemes, with the exception of some – usually, these days, defined benefit schemes in the public sector – that confer a protected pension age.

‘The primary reason for this increase is that people have been living for longer, so the authorities and pension industry are aiming for a greater level of sustainability across savers’ retirement timeframes. It is also designed to coincide with the increase of the minimum State Pension age to 67, so that it tracks 10 years below the State Pension age.’

How the implications of the NMPA increase differ with age

Gary says, ‘Although the NMPA will increase to 57 from April 2028, it will still be possible for those who reach their 55^th birthday before this date to potentially access or continue to access their pensions. But the proposed rules are complex and HM Revenue & Customs have yet to finalise the regulations in respect of transitional retirement.

‘The proposed rules mean very broadly and basically that:  
 

• Born on or before 5 April 1971 (and so turned 55 before 6 April 2026): Unaffected – NMPA remains 55. 
   

• Born between 6 April 1971 and 5 April 1973 (and so turn 55 between 6 April 2026 and 5 April 2028): NMPA remains 55 but could be delayed from accessing their pension savings unless they act before 6 April 2028. Can start taking pension at 55 and keep that right even after the rule change, but if they don’t there could be consequences – see below. 
   

• Born after 5 April 1973 (and so turn 55 after 6 April 2028): NMPA is 57. You cannot start taking your pension at 55 and will have to wait until 57, unless your scheme allows otherwise – see below. 

‘So, among other complications, there is a sensitive two-year cohort who, if they are caught unawares by the NMPA increase, could miss a chance to avoid being shut out from their pension savings for up to two years. Next we’ll explain why.’  

The implications for the two-year cohort

Gary says: ‘For those “caught in the middle” who turn 55 between 6 April this year and 5 April 2028, it all depends on whether they take action to crystallise their pension in that period. That doesn’t mean of course that they should do so, because for most savers this will be too early an age to start accessing their pension.

‘All it means is that they must realise that their NMPA will jump in April 2028 and block them from their private savings – at least, without suffering a tax penalty - for anything up to another two years.’

1. If you reach 55 before 6 April 2028 but opt NOT to crystallise any of your retirement benefits before this date, you won’t be able to start taking your retirement benefits until you reach your 57^th birthday. So, let’s say you reach your 55^th birthday on the 6 March 2028, but don’t access your pension before 6 April 2028, you won’t be able to take retirement benefits until you reach your 57^th birthday on 6 March 2030.

2. If you reach 55 before 6 April 2028, and DO crystallise pension benefits by moving into drawdown, purchasing a lifetime annuity or receiving a defined benefit scheme pension, these can continue in payment after 6 April 2028, even though you will not have attained the age of 57 by that date. Where someone is in drawdown, they will be able to vary the income they take and/or take lump sum withdrawals from crystallised funds. However, these individuals will not be permitted to crystallise any further pension benefits until they reach their 57^th birthday.[1]

Protected pension ages

Gary says: ‘Some pension arrangements will have protected pension ages below age 57, and these will be retained and continue to apply, even after 6 April 2028. If the pension does have a protected retirement age there is no requirement to register this directly with HMRC.

‘A protected pension age is scheme specific, not to the individual, and some pensions might have one and others might not, so if you contact the scheme they will be able to confirm if a protected retirement age is in place. There are some schemes that still retain a protected retirement age of 50 (or earlier in some instances) from when the last increase in the minimum pension age was implemented in April 2010.

‘If you do have a protected pension age, you must be careful as these can be lost in certain circumstances, mainly if you transfer them to another arrangement. If you are considering transferring your pension into another arrangement, it is imperative that you clarify if the transferring scheme has a protected age, and that this won’t be lost on transfer out.

‘It is also important to highlight that the armed forces, police and firefighters pension schemes will not be impacted by this increase.’

How the NMPA rise could affect retirement plans

Gary says, ‘While the NMPA might entail a bit of a "glitch” for some in pension access, we also need to consider that money-purchase pensions will become subject to inheritance tax from April next year.  The combination of these two factors could prompt more savers to think about accessing their pensions earlier than they might have normally envisaged.

'Retirement isn’t necessarily age related: it is more an assessment of what level of expenditure you will require in your retirement, and then estimating the age at which you will have built up sufficient assets to meet these expenditure requirements. For those who are looking to be in a position to retire at age 55, but who won’t reach that age before 6 April 2028 - and nor do they have protected retirement ages - they will need to have other funding arrangements in place.

‘These could include ISAs, savings or other investments, to bridge their expenditure requirements from ages 55 to 57. Others, who might not be able to save into alternative arrangements, might have to defer their retirement until they can access their pension funds.

‘For those who will reach 55 before 6 April 2028, changes in planning might still be required.

‘Some retirees look to take withdrawals from their pensions using the Uncrystallised Fund Pension Lump Sum (UFPLS) option, where lump sums are taken from the pension, with 25 per cent paid as tax-free cash and 75 per cent as taxable income, due to the tax-efficiency this can offer.[2] However, as previously highlighted, it is not possible to do further crystallisations from pensions after 6 April 2028, until you are 57, and these individuals will potentially have to fully crystallise their pension before 6 April 2028 to provide them with the flexibility to draw income after this date, but before their 57^th birthdays.

‘For those who have multiple pension arrangements, they might need to consolidate some or all of these pensions and fully crystallise, prior to 6 April 2028, so that they have flexibility in drawdown post this date.’

Check pensions and take advice before consolidating or transferring

Gary says, ‘Transferring pensions could result in protected retirement ages being lost, and specialist advice is required if you are considering transferring a pension that does include protections, as is often the case with guaranteed defined benefit schemes. Indeed, even if you adhere to the rules for transferring a pension with a protected retirement age, this is not guaranteed to be retained, as the receiving scheme must accept the protected retirement age, and they don’t need to do this.’

NOTES  

[1] As an example, let’s assume someone has two pension policies, both with values of £200,000, and they opt to fully crystallise pension 1 on 01/04/2028, releasing £50,000 in tax-free cash and moving £150,000 into drawdown. As this was done before the increase in the pension age, the individual can continue to draw income from the £150,000 moved into drawdown. However, in relation to the second pension, they won’t be able to crystallise this pension until they reach their 57^th birthday. 

[2] As an example, if someone has a pension value of £200,000, and they take a UFPLS of £20,000, this will still leave £180,000 uncrystallised for further UFPLS to be taken in subsequent tax-years.