Normal minimum pension age consultation launched by UK Government

The UK Government has launched a public consultation on plans to increase the minimum age at which people can access their pension benefits (known as normal minimum pension age or NMPA).

If implemented, NMPA will increase from age 55 to age 57 with effect from 2028.

The Government believes the increase is necessary to take account of the fact that people are living longer, and hopes to ensure as many people as possible have adequate private pension savings over and above the safety net provided by the state pension.

This increase in NMPA has been planned since 2014, but is it the best way of ensuring adequate private savings to support a reasonable standard of living in retirement?

And could the change further disadvantage younger generations who have had employment opportunities disrupted by the Covid-19 pandemic?

What’s the position right now?

Currently, most people can’t access their pension benefits before age 55 without incurring significant tax penalties, unless (i) they are in ill- health; or (ii) they benefit from a “protected pension age” which allows them to access their pension before age 55.

Protected pension age

When NMPA was increased from 50 to 55 in 2006, some pension scheme members were allowed to retain their age 50 entitlement where certain conditions were met.

Therefore, although NMPA is currently 55, some people can still access their pension benefits from a younger age.

What’s the Government’s plan?

The Government proposes that, from April 2028, NMPA will be increased to 57. As a result, many people will have to wait two years longer than they expected before they can access their retirement savings. But the change won’t affect everyone in the same way.

Firstly, the Government has confirmed that the increase will not apply to members of certain public sector pension schemes – for example those for the police and fire service.

Secondly, the existing exceptions to NMPA (i.e. poor health or protection) will continue to apply. In particular, there will be no change to any existing protection held –those who currently have a protected pension age below age 55 will not lose it as a result of the Government’s proposals.

Thirdly, the Government proposes to introduce an additional form of protection – let’s call it Protection #2 - which will allow many people to retain their current NMPA of 55. Under this proposal, anyone with a right under their pension scheme to access their benefits from age 55 or 56 will retain that right. Otherwise, their NMPA will increase to age 57 from 2028 onwards.

Protection #2 will be scheme specific, meaning that someone might find they have a NMPA of 55 in respect of benefits they hold in one pension scheme, but a NMPA of 57 in respect of benefits they hold in another.

Although this might complicate the retirement planning of those who had been expecting to be able to access all their pension pots at the same age, it’s not unusual for people to be entitled to different pots at different times.

Pension schemes are already allowed to set a scheme-specific minimum pension age that is above the statutory NMPA, so, someone might be entitled to take their personal pension from age 55, but not entitled to access their workplace pension until age 60.

Younger generations most affected

Those most affected by the increase to NMPA will be those who start saving into a pension scheme for the first time after February 2021, and those who leave one pension scheme and join another after that date.

This means that younger generations (who have already had education, training and employment prospects disrupted by Covid-19) will be disproportionately affected, with older workers in a typical defined contribution scheme more likely to already have an existing protected pension age, or be entitled to Protection #2.

Is increasing the NMPA the right move?

An alternative solution to achieving the aim behind these changes would be to increase the minimum level of contributions that must be made to workplace pension arrangements. At 8% of earnings, current minimum pension contributions for lower earners are likely to be insufficient to fund a comfortable retirement.

A recent report (“Building A Living Pension”) from the Resolution Foundation estimates that a worker aged 25 today would need an overall pension contribution of at least 11.2% a year in order to reach a living pension target on retirement at state pension age.

Increasing the minimum level of pension contributions would arguably have a much greater impact on retirement outcomes than increasing NMPA by two years.

If you would like advice in this area, or want to understand how the Government’s proposals might impact your scheme members, please do get in touch with us.