Tax Adviser Dan Gallon felt the need to explain just how badly the proposed changes to NMPA will impact pension savers before he left the ABI at the end of last week.
One of the less publicised pension changes being planned is the raising of the Normal Minimum Pension Age (‘NMPA’) from 55 to 57. This is to be effective from 2028 and will be included in next year’s Finance Bill. The NMPA is the age that you can usually first access pension benefits without incurring penal tax charges.
The proposals are too complicated and will create too much confusion for the tens of millions of people affected as they will not be simply be able to answer the question “At what age will I be able to access my pension”. The ABI now call for these proposals to be withdrawn until something fit for purpose is developed.
Pensions tax rules in the UK are some of the most complicated aspects of UK tax legislation – not ideal when pretty much everyone has to interact with them. The last thing that is needed is anything that significantly adds to this complexity particularly where the impacts will be felt for decades. Increasing complexity damages trust in the pensions system, complicates advice and adds cost throughout the process.
The increase in NMPA to 57 is intended to align with the raising of the state pension age to 67, and will reinstate the 10 year difference between the two ages. The state pension age is increasing on a staggered basis depending only upon your date of birth. Although younger people lose out by having to wait longer, the position is clear to everyone and as simple and fair as it can be. Unfortunately, the implementation of the increase in the NMPA is neither simple nor fair and it is going to be incredibly complicated.
The increase in NMPA will be subject to protections where some will remain entitled to access their pension at 55. Whether someone has a protection will be decided on a pension scheme by pension scheme basis. It will depend upon whether the pension scheme on 5 April 2023 gave an unqualified right to take benefits as at 11 February 2021.
HMRC have indicated that where pension schemes rules include a reference to benefits being taken from age 55, this would be an unqualified right; however, a reference to taking benefits from ‘normal minimum pension age’ would not meet the requirement. There will also be a ring-fencing where funds in a pot with protection are transferred to a new pension scheme, with funds transferred (and any investment income on those funds only) accessible at 55 whereas any new payments in would only be accessible at 57.
The issues around the proposed protections include:
- Confusion for individuals – it will often not be apparent whether a pension pot has a protected NMPA of 55.
- Complexity of messaging from financial advisers, pension providers and MAPS – they will need to raise the issues when discussing potential transfers with individuals, often without being able to provide a clear recommendation either due to uncertainty of the rules and future requirements or due to regulatory requirements on offering advice.
- Interpretation of scheme rules, with many not falling neatly into the cases suggested by HMRC, e.g. what if the wording includes ‘normal minimum pension age, which is 55’, or where there is a separate contractual right to access at 55 which is not mentioned in the pension scheme rules.
- Uncertainty as a result of interpretation difficulties, possibly lasting for decades to come. Someone in an auto-enrolment scheme now aged 22 may want to access their pension at 55 in 2054. Possible court cases or ombudsman referrals may not happen until then.
- Tracking of ring-fenced components of pension pots for decades will add significant additional information for individuals to grapple with and cost into the pensions value chain e.g. IFAs will need to consider what is ring-fenced and benefiting from protection and what is not when making recommendations.
- Conflict with other Government priorities
- Rationalisation of small pots may be discouraged where one of those pots has a protected pension age.
- Pensions dashboards implementation timelines and approach.
- Wake-up packs at set points ahead of the NMPA.
There are also issues on the transition to the new regime. There is a window until 5 April 2023 to transfer into a pension scheme that has the right to access at 55, provided that the scheme had this right as at 11 February. This could encourage transfers into schemes that have this right to access at 55 regardless of whether they are otherwise the best scheme e.g. when considering charges, investment availability etc. Some individuals who have transferred in the last few months will have moved from a ‘55’ scheme to a ‘NMPA’ scheme, without understanding the implications of doing so, losing out as a result due to the Government changing proposals since the original consultation was announced.
We have new concepts of mass-market protections and ring-fencing; we have analysis required of arbitrary wording included in historic pension scheme rules; we have uncertainty lasting for decades; and we have conflicts with other Government priorities.
In summary, the issues with the proposed reforms can be articulated when trying to answer the simple question we posed above:
“At what age will I be able to access my pension?”
Currently the answer is usually clear-cut – at 55. In the future, it appears the answer will be a muddle of:
“55 for this pot, 57 for that pot, it’s not clear for a third pot due to the terms and conditions not falling into HMRC guidance neatly and I have not been able to find out the terms and conditions of my fourth pot so have no idea when I can access those benefits.”
We therefore call for a rethink of the Government approach. We have previously called for a simpler approach to the change to 57 without arbitrary wording of scheme rules that no-one has read being a critical factor. Minimum pension age would be increased to 57 for everyone, except uniformed services and those who already had a protected pension age. This means people losing a right they would otherwise have had – so it is not a decision to be taken lightly, but it is important for the sake of simplicity, and the increase has been clearly signposted since 2014.
However, we now go further following revisions to the proposals included in the draft legislation. The latest proposals for protections simply induce too much complexity.
- The current proposals need to be discarded.
- They are too complicated.
- They are too arbitrary.
- They are too confusing.
Future UK pensioners deserve better. There are seven years before the proposed change – let’s use that time to find an adequate solution.