HM Treasury has just swept in with a change to the pension tax rules taking effect from midnight on November 3, 2021) which has closed down a little wheeze which was making some defined contribution master trusts even more attractive than usual. It’s disappointing even if it does put us back where we all originally expected to be.
The UK government announced in February this year that the minimum pension age was going up again, this time from 55 to 57, in 2028. That means that from April 2028 onwards you won’t be able to take your pension before age 57 unless you already had special protection for a lower age. The limited grandfathering options on offer for people who had hoped to take their pension at 55 only applied to people who already had, in their existing pension scheme’s rules, a set minimum pension age of less than 57.
So far so normal.
However the government had left, until yesterday, a loophole. Someone facing that rise and not benefiting from any grandfathering in their existing scheme could have transferred their pension into another pension scheme that did already have a minimum pension age of 55 set out in its rules. It was a unique opportunity for individuals to secure themselves a protected minimum pension age of 55, which was to close in 2023.
That route has now been closed early and without warning – transfers had to (broadly) have been requested before midnight on November 3, 2021. The rationale is laudable – it was potentially encouraging misguided transfers out of defined benefit schemes and setting any future deadline for transfers gives scammers free rein to rush people into unwise decisions.
From now on the normal rules will apply – after April 2028 you could only start your pension before age 57 if you had a right to do so under your scheme’s rules as they stood on February 11, 2021 and you don’t subsequently lose that protected minimum pension age. The previous protections still stand for individuals who had a right to go at 50 under the rules of their scheme on December 10, 2003, and for some individuals with even earlier pension ages under special tax concessions. Losing a protected minimum pension age on transfer remains a constant risk – the government has missed the opportunity to solve the much debated ‘block transfer’ provisions which have stymied many legitimate attempts to consolidate DC sections of hybrid schemes into master trusts.
This window only opened, and closed, in 2021– but it may still come as a disappointment to that part of the DC master trust market that did have a static minimum pension age in their scheme rules on February 11 this year and stood to benefit from the brief opportunity.
It could also have been a real driver for change for scheme trustees thinking of transferring their unloved DC sections to a master trust.
All of which makes me wonder whether the government needs a more joined up rethink on this.
Looking at the bigger picture, the government wants a bigger share of the pension fund pound invested in longer-term infrastructure projects and other illiquid investments. Bigger schemes are better at illiquids. So small DC arrangements are being pushed to wind up and consolidate into larger schemes.
So far most of the incentives have been more stick than carrot. Could this be the carrot? Would giving authorised DC master trusts a USP of lower protected minimum pension ages be a way to solve a bigger problem? I admit it’s an idea that needs more development:
- you couldn’t just favour the master trusts that happened to have particular drafting in their scheme rules on February 11, 2021 – we need a free market;
- I imagine the retail contractual pension market would want their share;
- the Revenue would need to be persuaded to loosen up the restrictions on transfers; and
- you still have to protect DB members from themselves, and everyone from scammers.
But the underlying principle is valid – give the trustees of small unloved DC arrangements a really good reason for switching their members to a large DC master trust, don’t just hound them out of existence with paperwork. What other carrots could be offered?