Increasing the normal minimum pension age (NMPA)
“The government always provide a safety net for those who need it in later life. However, the government’s intention is that as many people as possible have adequate private savings over and above the state pension to support the standard of living to which they aspire in retirement.”
The above is taken from the opening paragraphs of a consultation launched last week by HM Treasury on the surprisingly complex question of early access to retirement savings.
At present most savers have access to their defined contribution pension savings from age 55, but it has long been known that this access age was to increase to stay (broadly) 10 years before State Pension Age (SPA). And, as followers of this Blog will already be aware, SPA reached age 66 in October 2020, and is due to reach age 67 in 2028.
So it follows that changes to the normal minimum pension age (NMPA) - to allow early access to pension savings without incurring an unauthorised payments tax charge - should also now be revisited by the legislators.
The savings landscape has changed
Yet changes to the normal minimum pension age are now potentially more problematical than when the concept was first introduced in 2006. Back then the choices available to most pension savers were very limited indeed, and as a result few actually took their pension benefits at an early age. And even when pension savings were accessed early, at least part of the fund would usually be paid in a form that generated some form of annual income. This in turn helped achieve the government’s stated aim of augmenting the state pension to provide a better level of retirement income.
Yet these simple dynamics changed with the introduction of “pension freedoms” in April 2014. Suddenly savers had far more choice as to how they accessed and used their retirement savings, and our recent post looked at the experience of retirees in this new – far more flexible – savings landscape. Welcome as this change was, it now presents something of a conflict for the policy makers, as this paragraph from the consultation makes clear:
“While the government believes in the principle that individuals should have freedom and choice in how they use their money, it is also necessary to balance this with ensuring that people use their retirement savings for the intended purpose: income and security later in life”
The proposed new access age
So this latest consultation looks at the proposal to increase the normal minimum pension age to 57 from 2028. Whilst that move is not controversial (and indeed is expected by all), it does potentially generate some inconsistencies for savers, employers, and the pension industry to consider.
The consultation suggests that the government are keen to shield existing savers from a sudden increase in their NMPA from age 55 to age 57 by offering automatic protection to those already saving in a pension scheme.
This is, of course, a laudable approach. But as with all pension legislation it has the potential to lead to some unwanted complexity for employees and employers alike.
For instance an employee already contributing to a pension scheme might currently have the right to an early access age of 55. Yet if that same individual changed jobs and commenced saving in a new scheme then the new retirement funds might not be available until age 57. This has the potential to be confusing, whilst also making planning for retirement more rather than less complex.
Likewise employers might have to consider the impact of establishing a new pension scheme if it could inadvertently disadvantage those employees who want to take their savings at an early age.
Consultation not legislation
So there is much to be considered here, but it is important to remember this is only a consultation rather than the final legislation. Yet regardless of the consultation outcome, the key task for employers will be to ensure clear communication of the new rules to all employees.
Of course there are many ways of delivering important pensions messaging to employees, but Howden Employee Benefits & Wellbeing would particularly encourage employers to embrace the pension surgeries delivered by our team of experts. These can be delivered face-to-face in the workplace, or via the increasingly popular option of video-conferencing technology. Such sessions are invaluable in helping employees understand their retirement savings journey and planning accordingly. For more information on our pension scheme services please visit this page.
The NMPA consultation concludes on the 22nd April 2021, and draft legislation is expected in summer 2021. We will of course aim to update our followers on any significant changes as a result of this process later in the year.
For more information on any of the above topics, please speak to your usual Howden Consultant in the first instance, or visit our website for other contact options. For the latest details on COVID-19 & Employee Benefits provision please visit our coronavirus hub.
Steve is Head of Benefits Strategy, Howden Employee Benefits & Wellbeing, and is an award-winning thought leader on Pensions, Employee Benefits, and Human Resources issues. He is occasionally accused of making Employee Benefits interesting.
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