Protected early pension age
When is a member allowed to take their pension early?
Some members have the right to take benefits before minimum pension age. Here we review the three categories of members with these rights, along with the conditions affecting them.
Protected early pension age – what do you need to know?
- Members of some retirement benefit schemes or S32 arrangements may have the right to take benefits from age 50.
- Members with prescribed occupations may have a right to take benefits before age 50 under a retirement annuity contract or personal pension
- Members of some occupational pension schemes may have a right to take benefits before age 50
- Taking benefits from a pension before age 50 may result in a reduced lifetime allowance for that Benefit Crystallisation Event.
- When someone with a protected pension age takes their benefits, to maintain their protection they must become entitled to all the benefits under the scheme on the same day.
- A protected pension age can be lost in certain circumstances
- A protected pension age is only protected on transfer if this is part of a block transfer
- Members joining any type of registered pension scheme on or after 6 April 2006 cannot have a protected early pension age (except for block transfers).
Why do we have protected early pension ages?
On 6 April 2010, the normal minimum pension age increased from 50 to 55. Ordinarily, there are only three occasions when benefits may be taken earlier than these ages – ill health retirement, serious ill health retirement (both of which are covered in our article When can retirement benefits be taken?) and where an individual has a protected pension age.
We’ll look at the three categories of members with the right to take benefits before minimum pension age, along with the conditions affecting them.
Where the conditions are met, the protected pension age applies to all benefits the member can take under the scheme, including benefits without an unqualified right (covered below), new benefits introduced after 5 April 2006 and any benefits in respect of a transfer into the registered pension scheme.
Members with a right to take benefits before normal minimum pension age
- Members with a right to take benefits from age 50 under a retirement benefit scheme or S32 arrangement (Category 1).
- Members with a prescribed occupation and a right to take benefits before age 50 under a retirement annuity contract or personal pension (Category 2).
- Members with the right to take benefits before age 50 under an occupational pension scheme (Category 3).
These categories don’t include:
- free-standing additional voluntary contributions (where members could choose to fund to a proposed early retirement date), and
- personal pensions and stakeholder policies with retirement ages from 50, where the policyholder doesn’t have a prescribed occupation.
These members aren’t normally* eligible for a protected pension age.
*some FSAVC scheme rules may have an unqualified right to take benefits early depending on the interaction with the normal retirement date of the main scheme.
Members with a right to take benefits from age 50 under a retirement benefit scheme - Category 1
This protection covers members of retirement benefit schemes and Section 32 policies who had, at 5 April 2006, a right to take pension benefits from age 50 onwards. This right could be protected after 6 April 2010.
The following criteria must be met in order for these rights to be protected:
- the member must have had the right on 5 April 2006 to take a pension and / or a lump sum at a minimum age between 50 and 54
- the right must be unqualified. This means that in order to take benefits at this early age, no other party (eg trustees and / or employer) needs to give their consent
- the right must have been set out in the scheme rules on 10 December 2003 (the date the minimum pension age increased from age 50 to age 55 was announced), and
- the member must have had that right on 10 December 2003 or acquired the right when they joined the scheme if this was after 10 December 2003.
On 10 December 2003 the scheme rules stated that a member may take benefits before age 55 without anyone's permission, if they were made redundant. Therefore, any member made redundant after 6 April 2006 who is aged over 50 but under 55 may take their benefits without breaching the minimum pension age rule.
If the scheme rules state that the trustees’ and / or the employer’s permission is required before benefits can be taken, then this is not an unqualified right and the members are not entitled to protect their early pension age.
See Finance Act 2004 Schedule 36 Paragraphs 21 & 22
Members with a prescribed occupation and the right to take benefits before age 50 under a retirement annuity contract or personal pension - Category 2
Before 6 April 2006, some people with a prescribed occupation (such as footballers, athletes, divers etc) who took out retirement annuity contracts and / or personal pensions had a right to take pension and / or lump sum benefits before they were 50.
In order to protect this right, these people had to meet two conditions:
- they must have been in a prescribed occupation
- the right to take benefits before age 50 must be unqualified
Any individual who protects their pension age on this basis may have a reduced lifetime allowance if they take benefits before reaching age 50.
See Finance Act 2004 Schedule 36 Paragraphs 21 & 23 & Reg 3 The Registered Pension Schemes (Prescribed Schemes and Occupations) Regulations 2005 - SI 2005/3451
Occupational pension scheme members with the right to take benefits before age 50 - Category 3
Before A-Day (6 April 2006), certain professions (normally sports people or those in dangerous occupations) were granted normal retirement ages below age 50. Again, this right could be protected if all of the following conditions are met:
- the member must have had the right on 5 April 2006 to take a pension and / or a lump sum before the age of 50
- the right must be unqualified. This means that to take benefits at this early age, no other party (eg trustees and / or employer) needs to give their consent
- the right must have been set out in the scheme rules on 10 December 2003
- the member must have had that right on 10 December 2003 or acquired the right when they joined the scheme if this was after the 10 December 2003
Any individual who protects their pension age on this basis may have a reduced lifetime allowance if they take benefits before reaching age 50.
See Finance Act 2004 Schedule 36 Paras 21 & 22
Reduced lifetime allowance
Any member protecting their pension age under categories 2 and 3 above may have a reduced lifetime allowance. This is because they were entitled to take benefits before age 50, and it’s also why this condition doesn’t apply to members protecting their pension age under category 1, as their entitlement only started at age 50.
Those members in category 2 or 3 who are also members of a prescribed scheme will not have a reduced lifetime allowance.
The Registered Pension Schemes (Prescribed Schemes and Occupations) Regulations 2005
- SI 2005/3451
Where the reduction applies, the individual's lifetime allowance will be reduced by 2.5% for each complete year between the date the BCE occurs and the date the person reaches age 55. This reduced lifetime allowance is used to calculate whether any lifetime allowance charge is due, but in addition, it’s also used to calculate the pension commencement lump sum (as this is limited to 25% of the available lifetime allowance, in this case, the reduced lifetime allowance). If the member has an individual lifetime allowance, due to primary protection for instance, then the reduction applies to the lifetime allowance after the enhancement factor has been applied.
When someone crystallises benefits from a scheme with a protected pension age and then subsequently crystallises further benefits, the lifetime allowance is recalculated at that point in line with the usual calculations i.e it revalues the amount of the original BCE by LTA now/ LTA at BCE.
See Finance Act 2004 Schedule 36 Para19 & 23A
Bob crystallised benefits worth £300,000 on his 35th birthday in 2006/07. The normal minimum pension age applicable in 2006 was 50. Standard lifetime allowance (Bob doesn’t have an enhancement factor) was reduced by 2.5% x 14 years = 35%, making Bob's reduced lifetime allowance for 2006/07 = £975,000.
As the crystallised amount is within the lifetime allowance, there’s no lifetime allowance charge.
In 2010, on his 39th birthday, Bob crystallised benefits from another scheme, under which he had a protected pension age. At this time, the standard lifetime allowance was £1.8m and the total value of the benefits being crystallised was £500,000. However, the normal minimum pension age had increased to 55, meaning the standard lifetime allowance will be reduced by 15 years. The £300,000 previously crystallised is increased in 2010 by the increase in the standard lifetime allowance ie £300,000 x 1.8/1.5 = £360,000 to calculate the current value of crystallised benefits.
The standard lifetime allowance is then reduced as before, but this time it’s based on a 15-year reduction, giving a reduced lifetime allowance of £1,125,000 (1.8m - (15 x 2.5%)). Then, the current value of the previously crystallised benefits is taken off to leave £765,000 reduced lifetime allowance remaining. So if benefits of £500,000 are crystallised, there’s no lifetime allowance charge.
Bob then decides to crystallise further benefits from another scheme on his 56th birthday (ie after he has reached the normal minimum pension age) in 2027. Let’s say the standard lifetime allowance on this date is £1.3m. The previous amounts crystallised would then be revalued in 2027 using the current SLA at that date, ie £300,000 x 1.3/1.5 = £260,000 and £500,000 x 1.3/1.8 = £361,111.
So the total of benefits previously crystallised is £621,111, leaving £678,889 lifetime allowance available for this benefit crystallisation.
Prescribed schemes and lifetime allowance
There are certain schemes, listed in the Registered Pension Schemes (Prescribed Schemes and Occupations) Regulations 2005, which give the right to benefits before minimum pension age but without the reduction in lifetime allowance. Examples of these occupations are police officers, members of the armed forces and fire fighters.
See Para 19(3)(c) Sch 36 & Reg 2 The Registered Pension Schemes (Prescribed Schemes and Occupations) Regulations 2005 - SI 2005/3451
Taking the benefits
When someone with a protected pension age takes their benefits, they must become entitled to all the benefits under the scheme on the same day. This condition also applies if there has been a block transfer (see below). The receiving scheme must be able to crystallise all uncrystallised rights on the same day to allow the protected pension age to apply.
If this person dies within six months of payment of the tax-free cash (pension commencement lump sum) but before becoming entitled to the pension, then this condition will still be met.
Where a person has at least two of:
- scheme pension under defined benefit arrangement
- scheme pension under money purchase arrangement
- a lifetime annuity
under the same scheme, then the condition will only be met if the person becomes entitled to all benefits within a six-month period, starting with the entitlement to the first pension. If the person becomes entitled to at least one type of pension and dies within six months, then the condition would be met as long as the scheme administrator believed the person had been entitled to all pensions under the scheme within the six-month period.
There is no requirement for benefits to be taken at the protected pension age, just that (if taken before normal minimum pension age) they must all be taken on the same day. If benefits are delayed, any reduced lifetime allowance would be calculated at the actual crystallisation date (ie not at the protected pension age).
It should be noted that these rules apply at a scheme level and not an arrangement level. Depending on the category of protected pension age, a scheme may be designed so that it contains some benefits payable to a person before the normal minimum pension age (because they qualify for protection) and some benefits payable to that person only after having reached normal minimum pension age.
If all benefits are not crystallised, payments from the partially crystallised benefits would be unauthorised member payments (UP) and taxed as such. To avoid any UP, the client cannot phase retirement benefits in the existing scheme between their protected early pension age and the normal minimum pension age. Once the member reaches normal minimum pension age, the option to phase retirement is available (as the member is then not relying on their protected early pension age to take their benefits).
See Finance Act 2004 Schedule 36 Paragraphs 22(7)(a) & 23(7)
Articles 42 & 43 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572
and Pensions Tax Manual PTM062200
Please note, whilst scheme rules may not allow all HMRC pension freedom payment options, the trustee/ administrator may choose to use a permissive override allowed by HMRC (Finance Act 2004, Section 273B). This is not mandatory and any scheme may be unwilling or unable (perhaps due to system/ plan constraints) to apply the override.
Where the override is applied, this effectively permits the scheme to make certain payments allowed by HMRC even where the scheme rules are more restrictive and would prevent such payments. For example, “blink of an eye” drawdown may be possible, so that tax free cash could be paid by the scheme with the balance of fund being ‘notionally’ designated to drawdown. There is no drawdown plan/ contract actually set up in the original scheme but instead an immediate drawdown to drawdown transfer takes place to another pension scheme chosen by the member. The result is the member does not lose out on protection as this transaction meets the condition, applying to both pre A-day tax free cash and early pension age protections, which states all benefits must be put in to payment at the same time.
Loss of protection
The protected pension age could be lost in certain circumstances:
- where the member is employed by certain persons after taking benefits, or
- if the benefits are transferred out of the scheme, except if part of a block transfer.
Where the member is employed by certain people after taking benefits
For category 1 members (protected early pension age from age 50), this restriction applies only where:
- entitlement to benefits arises after 6 April 2010 and
- the member is employed by any one of the following employers after becoming entitled to the benefits and
- the member does not meet any one of four re-employment conditions.
The employers are:
- an employer who employed the individual in the six months before the benefit entitlement arose and who was also a sponsoring employer in the scheme under which benefit entitlement arose in that six month period
- any person connected with the employer described in the previous point (not necessarily a sponsoring employer), or
- any sponsoring employer in the pension scheme under which benefit entitlement arose that is connected with the individual.
'Connected' is defined in s993 to 995 Income Tax Act 2007 and further guidance can be found in PTM027000
The re-employment conditions are:
- where the individual was recalled by the Armed Forces
- where there was a break in employment of at least six months
- where there was a break in employment of at least one month and benefits may be abated (public service pension schemes), or
- where there was a break of at least one month and the employment is materially different (duties / responsibilities, not a change in hours).
If any of the four re-employment conditions apply, protection won’t be lost.
For category 2 or 3 members (protected early pension age before age 50), protection is only lost if they are employed by a sponsoring employer in the scheme under which benefit entitlement arose and the- individual is 'connected' (see above) to that sponsoring employer.
See Finance Act 2004 Schedule 36 Para 22(7)(b) & 22(7B) -(7J)
Pension Taxation Manual PTM062230
Where the benefits are transferred out of the scheme
A protected pension age is only retained if the transfer is part of a block transfer.
Pensions not in payment
In respect of protected pension age, protection will remain in the event of a block transfer. A transfer is a block transfer if:
- it involves the transfer in a single transaction of all the sums and assets held for the purposes of (or representing accrued rights under), the arrangements under the transferring pension scheme, which relate to the member and at least one other member of that pension scheme, and
- either the member was not a member of the receiving pension scheme before the transfer, or they have been a member of that pension scheme for no longer than such period as is prescribed by regulations made by the Board of Inland Revenue (12 months).
Pensions in payment
Since 6 April 2015, for pensions in payment the definition of block transfers for protected pension ages is where there is a recognised transfer from one registered pension scheme ("the old scheme") to another registered pension scheme ("the new scheme"), and there is a transfer in a single transaction of all accrued (vested) rights which relate to the member. This does not have to happen on the same day, as there could be administrative reasons preventing this. In other words, there’s no requirement for a ‘buddy’.
See Finance Act 2004 Schedule 36 paragraphs 21-23A
Transitional flexibility – block transfer amendments – 19 March 2014 to 5 April 2015
Before the introduction of the revised rules on block transfers in respect of protected early pension ages, The Finance Act 2014 introduced transitional flexibilities which temporarily relaxed the block transfer rules for both protected early pension age and protected lump sums. During the period 19 March 2014 and 5 April 2015 (inclusive), the previous requirement for a block transfer to have at least two members was temporarily relaxed. This meant people in single member schemes, who were previously unable to transact a buddy transfer, could transfer and maintain their protection.
The transfer must have met the other block transfer rules, for example it must have been for all of the benefits under the plan (ie no partial transfers).
The transfer must have taken place on or after 19 March 2014 and before 6 April 2015. The member had to have become entitled to all benefits before 6 October 2015. If entitlement had not arisen by this date, then any protection will be lost and any payments made before minimum pension age will be unauthorised member payments.
After 6 April 2015, the original block transfer rules have been reapplied in respect of uncrystallised funds for both protected lump sum and protected pension age.
Transfer, reorganisation and winding up of schemes
The Pension Schemes (Transfer, Re-organisation and Winding Up) (Transitional Provisions) Order 2006 provides for protection of low normal retirement ages on both TUPE transfers and the reorganisation of a sponsoring employer’s pension schemes between 10 December 2003 and 5 April 2006, providing strict conditions are met. These regulations also provide for protection due to scheme wind-up, where benefits are secured under deferred annuities, whether the wind-up commenced before or from 6 April 2006.
See Articles 13-16 The Pension Schemes (Transfers, Reorganisations and Winding Up) (Transitional Provisions) Order 2006 - SI 2006/573
ARTICLE by The Technical Team
When can retirement benefits be taken?
Information on when can retirement benefits be taken, exceptions and key points.
ARTICLE by The Technical Team
Primary protection was introduced by Finance Act 2004 to protect people from unnecessary tax charges where their total benefits were valued at £1.5m (the newly introduced lifetime allowance) or more on 5 April 2006.
ARTICLE by The Technical Team
Enhanced protection was introduced by Finance Act 2004. Individuals who were eligible and continue to hold enhanced protection will not suffer any lifetime allowance excess tax charge when they take pension benefits in excess of the lifetime allowance.