Occupational & Personal Pensions

The following is a summary of future reforms to occupational and personal pensions (including stakeholder pensions). 

Statutory minimum retirement age

What’s Changing?

All registered pension schemes must incorporate the normal minimum pension age of 55 into their rules by 6 April 2010. It is for schemes/employers to decide how and when to make this change in a way that best suits their needs.  This is a matter of tax legislation and is contained in the 2004 Finance Act. 

Who does it affect?

The change affects all members of all types of pension schemes, unless they have a protected retirement age. 

Are there any exceptions?

There are two broad exceptions:

1. ill-health early retirement; and
2. members with a protected lower retirement age.

However, anyone who has drawn benefits from a pension plan before 6 April 2010, and is still under the age of 55 by 6 April 2010, will continue to be able to receive those benefits from that plan.  But they would have to wait till age 55 to take another pension from that plan (e.g. AVCs) after 5 April 2010 or a pension from another plan after 5 April 2010. 

Who has a protected lower retirement age?

In an employer’s scheme, you have to have an unqualified right to draw your pension below 55.  That right must be in the rules on 10 December 2003, and you must have had the right on 5 April 2006. 

To have an ‘unqualified right’, the rules of the scheme must allow you to apply for and draw your benefits without the need for the employer’s or trustee’s consent (in normal health). 

But, protection is subject to certain restrictions:

1. the full pension must be taken;
2. you must leave employment and not return to employment with any employer connected with the scheme;
3. protection is lost if you voluntarily transfer your benefits after 5 April 2006.  But it is not lost if the transfer is to new scheme by bulk transfer, e.g. in a wind-up.  In a bulk transfer, you keep the protected pension age that you had on 5 April 2006 in the previous scheme. (Successive bulk transfers can be made without affecting a member’s protection.)

Different rules apply to Retirement Annuity Contracts (RAC) and personal pension plans. These plans can retain a retirement age lower than 50 in respect of ’special occupations’ (e.g. footballers who can retire at age 35), as long as that right existed before 5 April 2006. For a list of these occupations please click here.  There is no protection for retirement ages between 50 and 54 years.

But note, since ‘A’ Day, a reduction of 2.5% is applied to the lifetime allowance for each year before normal minimum pension age (50/55) that the pension is taken.

In the public sector, certain schemes listed in the Registered Pension Schemes (Prescribed Schemes and Occupations) Regulations 2005 give their members a right to take pension and lump sum benefits below the normal minimum pension age.  These schemes are:

• The Armed Forces Pension Scheme
• The British Transport Police Force Superannuation Fund
• The Firefighters’ Pension Scheme
• The Firemen’s Pension Scheme (Northern Ireland)
• The Gurkha Pension Scheme
• The Police Pension Scheme
• The Police Service of Northern Ireland pension Scheme, and
• The Police Service of Northern Ireland Full Time Reserve Pension Scheme.

Where a member of such a scheme takes a pension or lump sum benefits before the normal minimum pension age, there will be no reduction in the individual’s lifetime allowance.

What will be the consequences (if any)?

Research published in June 2009 suggests that perhaps as much as 80% of 50 year-olds were unaware of the change and planned to draw on their pensions before age 55.  This raises questions as to whether savers should draw their benefits before 6/4/2010 while they can, or wait till later. 

What about redundancy?

If the scheme had a rule by/on 10 December 2003 that gave its members an unqualified right to take pension benefits before 55, but only if they are made redundant, and any members are made redundant after 5 April 2010, are aged over 50 but under 55 and exercise their right to take pension benefits, they will have a protected pension age and will not be liable to a tax charge. 

Lifetime Allowance and Annual Allowance

What’s Changing?

Since the Lifetime Allowance (LTA) and Annual Allowance (AA) were introduced in 2006, they have increased each year.  Now, the LTA and AA will rise in the 2010/11 tax year but will then be frozen for at least the next 5 tax years. 

• The LTA will be fixed at: £1.8m
• The AA will be fixed at: £255,000.

Who does it affect?

Everyone, except those who had large pension pots at April 2006 and took Enhanced Protection.

Are there any exceptions?

If you have large pension savings and opted for Enhanced Protection, benefits can be taken without the application of any recovery charge, regardless of their value and regardless of the change in the LTA (to qualify for Enhanced Protection, you had to cease being an active member and opt out of making further pension savings before 6 April 2006.) 

There is no Annual Allowance in the year of taking benefits.

What will be the consequences (if any)?

The Trivial Commutation Limit is linked to the LTA, so this will also be fixed at: £18,000 (1% of the LTA). 

Anyone who has opted for Primary Protection will need to be aware that their personal LTA will stay frozen too.  That is because Primary Protection values an individual’s pension rights on 6 April 2006, to produce a percentage uplift to the lifetime allowance. 

For example, if someone’s pension benefits on 6 April 2006 were valued at £2.25 million this would equate to 150% of the LTA.  Benefits would then be protected from the recovery charge until the value exceeded 150% of the Lifetime Allowance at the point they were drawn.  So someone with a personal LTA of 150% would only protect pension savings up to £2.7m throughout the period between 6 April 2010 and 5 April 2016.

Abolition of ‘contracting out’ for defined contribution schemes

Contracting out for defined contribution schemes will be abolished. Contracting-out certificates for these schemes will be automatically cancelled.  The result will be that members of money purchase schemes will be automatically contracted back in to the S2P from the date of cancellation.  This is likely to become effective from 2012