The Government’s proposals to increase the normal minimum pension age from 55 to 57 are being introduced with good intentions to protect savers; however, they would bake in complexity for all savers for decades to come. It’s important to get it right for the future now, with a simpler approach.
In 2010, the age at which you can access a private pension increased from 50 to 55, as part of a set of rules known as pensions simplification. Those rules, passed in 2004, did simplify pensions - but not enough. They removed some inconsistencies across types of pensions, but left differences and quirks that are responsible for some of the maddening complexity that pension savers now face.
Now that the Government is increasing the normal minimum pensions age again, we want simplicity to be the watchword. Its proposals include a new protected pensions age of 55 for some people - no-one knows yet exactly who or how many because the rules are not written yet. This would create an unnecessary layer of complexity and uncertainty for all savers.
It would mean the messages customers receive about their pension will be less consistent, always caveated, and the decisions they have to make will be more complicated. They will not know whether they have a protected pension age or not, because it’s entirely arbitrary, based on a pension scheme’s rules, and will still not be obvious from reading them. It could lead to legal disputes about what is and isn’t protected.
Savers might have one pot with a protected pension age and another without. If they transfer out, they lose the protection (not in all cases, but that’s another complex caveat for another blog…). This might lead them to keep the protected pot, even if it’s not in their interests, whether due to charges, performance or service. If they do decide to transfer, they may well receive additional warnings which may hold up the process – counter to the drive for competition, for faster transfers and the progress the industry has already made in that respect.
The proposed arbitrary and opaque approach to protected pension ages would also complicate the policy goal to consolidate small pots accrued through automatic enrolment, to which industry and Government are working together to propose solutions. Transfers would have been a very small issue when the equivalent change happened in 2010, but there are many more transfers now, hundreds of thousands a year – and they generally work efficiently.
A lot else has changed since the last increase in 2010. The protected pension ages introduced then should, of course, stay. But they were linked to particular professions, on the assumption that their pension would be paid immediately after their employment ends, and these were generally in defined benefit schemes. There are now far more people in defined contribution schemes - well over 10 million - as a result of automatic enrolment. In addition, unlike in 2010, the Treasury has proposed that personal pensions may have protected pension ages regardless of profession, adding millions more policies that are potentially affected. With so many people who might be in scope, it could be the norm that customers have this protection, rendering the policy pointless.
It would also set a precedent for the future, given the anticipated shift to age 58 when the State Pension age increases to 68, and indeed any other similar changes in future. So we think there should be no new protected pension ages in the current proposals, other than those linked to specific professions, like in 2010.
To be clear, this would remove a right that some consumers would otherwise have, and that is not a step to be taken lightly. But in the context of the Government removing that right for most people, and with the counterbalance of simplicity that favours everyone, we think simplicity wins.
We can argue about whether it is worth increasing the age from 55 at all (and indeed many in the industry and our membership have quite reasonably called for no change) but that is not currently on the table. When the Government first consulted on the increase to 57, and in our review of pension freedoms 5 years on, we were in favour for the sake of certainty and clarity. However, the implementation approach provides neither.
Given changing life expectancy and State Pension age - not to mention concerns about accessing pensions early and in full - it’s still a reasonable policy. But we wanted certainty for customers, and this doesn’t deliver it. We’d like the Treasury to think again, and to keep it simple.