Pension party put on hold

There’s a whole host of heads buried in the sand when it comes to personal finance. Unexciting topics such as financial planning for your retirement and the intricacies of pension schemes are only likely to push heads, shoulders, knees and even toes further into the silica. Indeed, pensions are about as interesting as watching paint dry. However, whether you’re aiming to reach financial independence or not, they are crucial to financial wellbeing – so jump into the pensions fray we must!

The government has recently crystallised its plans to change/meddle/interfere/tinker (delete as appropriate) with the normal minimal pension age (NMPA). I won’t aim to explore the why*, but rather aim to summate the what and how this influences you.

State of play

Before diving into the future changes, let’s look at the state of play in the pensions domain. There are four main groupings of pensions in my mind:

  1. State Pension. Accessible at (funnily enough) your state pension age (SPA), which is currently most likely to be 68yrs. HMRC inform me I’ll receive £9,371.27/yr from mine. I won’t embroil us in the ‘will the State Pension still be around’ debate; it’s a story for another time.

  2. NHS Pension (2015 scheme). Accessible at your SPA too, which is currently most likely to be 68yrs.
    If you want, you can claim your NHS Pension early at any age from 55yrs – 67yrs, but suffer a reduction in the money you’ll receive because of it. See Part III of the NHS Pension series.

  3. SIPP (self-invested personal pension). Accessible from NMPA, which is currently 55yrs.

  4. Other DC (defined contribution) pensions e.g. NEST, workplace pensions. Accessible at NMPA, which is currently 55yrs.

Chances are you have at least two of the above pensions. If you’ve worked for the NHS, for another employer and opened a SIPP then you may have all four.

Winds of change

We know how things are. How are they going to change? Time for a, err, timeline…

2010 – The NMPA was increased from 50 to 55yrs.

2014 – It was announced that the NMPA was due to rise from 55yrs to 57yrs from 6th April 2028.

2021 (February) – The government published the results of a consultation regarding this rise in NMPA.

2021 (July) – The government published a draft of the legislation that would bring this into effect.

What does it mean?

This change has no real bearing on the current state pension, although continues the trend of rising pension/retirement ages. Indeed, NMPA will have risen from 50yrs to 57yrs between 2010 and 2028.

The impact on the NHS Pension 2015 scheme is likely to be fairly niche. It could be that it is no longer possible to claim the NHS Pension at 55yrs, where you would have been stung with actuarial reductions anyway, but at 57yrs instead. It may be that one can still claim the NHS Pension at 55yrs. The NHSBSA replied to my query with a succinct:
“Currently we have received no guidance about the increase to the minimum retirement age from 55 to 57. “

The impact on SIPPs and other DC pensions is where the crux of the matter lies. Where previously accessible at 55yrs, it will be 57yrs from April 2028. This is largely going to affect on people who would have been claiming their pension around that time – things will be pushed back a couple of years.

An interesting sub-plot is the potential influence on the lifetime allowance (LTA). Accessing pensions later means (potentially) two years’ more contributions and growth. This may tip one over the edge of the LTA threshold and incur a tax bill, or increase the size of it if it was coming your way anyway.

In the FIRE-ing line

The government’s consultation document notes that “…most people do not now retire at 55.”

Although this implication of this sentence is that people retire later, chances are that if you’re reading this post you may plan on retiring earlier than 55yrs. These changes to the NMPA may well alter your plans.

It might be that your early retirement blueprint was some variation on the theme:

X yrs – stop work and fund yourself by selling investments in a S&S ISA
55yrs – start drawing money from your SIPP and/or workplace pension
60yrs – start using money from your LISA
68yrs – start taking the NHS Pension and state pension

Naturally the changes to the NMPA will impact on this set up. If the plan had been to use investments in an ISA to bridge the gap between ceasing work and starting to draw money from your SIPP, that money will have to last an extra couple of years.

The flip side is that value of your SIPP may not need to be as large, as it’s doing fewer years’ heavy lifting. Contributions that were going to your SIPP could be funnelled to ISA/LISA’s instead, which may also mitigate the LTA issue. There are obvious tax downsides to this, however.

Through the loophole

It all seems fairly cut and dried. NMPA rising to 57yrs in April 2028. Done deal. End of.

Except we’re actually in a window of opportunity to somewhat circumvent this change.

Some people will automatically enjoy ‘protected pension age’ i.e. they will still have the ability to start claiming their pension at 55yrs. Namely, individuals who are members of the pension schemes of the ‘uniformed services’ (a group to which the NHS does not belong despite many of its employees wearing outfits that looks suspiciously like uniforms) will enjoy this benefit.

If you’re not a fireman, police officer or Ghurka, it seems you can still maintain a 55yr NMPA if:

  • You’re a member of an HMRC-registered pension scheme
  • Whose pension scheme rules on 11 February 2021 conferred an unqualified right for you to take your pension benefits earlier than 57yrs
  • And you joined the scheme before 5th April 2023

(NB this is specific to an individual as a member of a particular scheme, it would not apply to all the pension schemes of which you are a member.)

What’s an “unqualified right”? It appears to be where the rules of the pension expressly state that benefits can be drawn from 55yrs. Rules that reference ‘the NMPA’ or the legislation that underpins it don’t seem to count.

Ergo all you have to do to circumvent the planned changes is find a pension provider whose rules, prior to February 2021, stated explicitly that you had the right to take your pension benefits at 55yrs of age. Then either set-up a new pension with that provider, or transfer your existing SIPP/workplace pension into it, before April 2023. Easy, right?

Optimising

To the key question – which pension providers have worded their T&C’s in such a way as to give you an ‘unqualified right’ to take that pension at 55yrs?

The jury is out at the moment. Some big name SIPP providers seem as if they are off the cards in this regard; Vanguard, AJ Bell, Hargreaves Lansdown and Interactive Investor all reference the increase in NMPA to 57yrs in either their T&C’s or FAQ’s. Fidelity may have worded things so as to fulfil the ‘unqualified right’ criteria (credit to MSE Forum user MDMD), but that’s still unclear.

With things so hazy it would be pertinent to wait for the dust to settle a bit instead of immediately transferring your pension(s) to a different provider. A case of masterful inactivity, cat-like observation – you have until April 2023 to execute any changes.

Action plan

If your retirement plans revolve exclusively around the NHS Pension (+/- state pension), this news may be fairly inconsequential for you. A word of caution, however. Changes to pensions are happening all the time – for example some DB pensions will be revalued by a lesser amount from 2030. It would be asinine to assume anything other than the NHS pension undergoing future changes (read: devaluation). A more diverse or multifaceted retirement approach will provide greater shelter from the winds of change.

If your retirement plans involve a DC pension or a SIPP, it seems pertinent to try and have that money in a scheme that will confer on you the ability to take it at 55yrs. It’s a flexibility thing – it makes your money accessible earlier, which could be beneficial. It may be of no material consequence down the line, though in general it’s better to live with ones hands untied rather than bound behind ones back.

TTFN,

Mr. MedFI


* Depending on which parts of the Government’s rhetoric you read, the change might occur to:
…”support the government’s agenda around fuller working lives and has indirect benefits to the economy through increased labour market participation, while also helping to make sure pension savings provide for later life.
…”encourage individuals to save for longer for their retirement, and so help ensure people have financial security in later life.”
…”reflect long-term increases in longevity and changing expectations of how long people will remain in work and in retirement.”

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