While retirement benefits can’t usually be taken before the age of 55, there are three exceptions – ill health, special occupations and unqualified contractual early retirement rights.
Generally, the minimum pension age is 55. Scheme rules vary though, so some members could take benefits at different ages.
Aside from ill health, the two situations allowing members under 55 to take benefits are special occupations and unqualified contractual early retirement rights.
If a member is medically incapable of carrying out their current occupation due to injury, sickness, disability or disease, they can take benefits at any age.
Serious ill health can mean benefits may be commuted to a lump sum.
Minimum pension age
Generally, scheme rules must not allow members to take any retirement benefits from a registered pension scheme before the minimum pension age of 55. Scheme rules vary though, and some may allow members to take benefits from different schemes or separate arrangements within the same scheme at different ages.
The government has stated that the minimum pension age would increase to 57 in 2028, when state retirement age increases to 67 (maintaining the 10-year differential between minimum pension age and state pension age).
Before 6 April 2010, the minimum pension age was 50. If a member vested benefits before this date they were not affected by the change to 55. This included someone who was in drawdown and then decided to buy a lifetime annuity after 6 April 2010, even if they were still under 55. If retirement benefits are paid out before the appropriate age (other than because of ill-health, death or protected pension age) these benefits will constitute an unauthorised payment and be taxed as such.
Protected early pension age
There are two situations, other than ill health, where benefits can be taken when the member is under 55.
Before 6 April 2006 there were special occupations which traditionally had low retirement ages such as professional footballers, boxers, dancers and trapeze artists.
Funds built up from these special occupations can be taken prior to age 55 where certain conditions are met.
If a member has an unqualified contractual early retirement right (not dependent on agreement from the employer / trustees), which was in place prior to 10 December 2003 (the date the government announced the change to the minimum retirement age), then benefits can also be taken early.
Fuller details on the rules and eligibility for an early pension age – as well as the lifetime allowance treatment and the transitional changes made in Finance Act 2014 – are discussed in Protected Early Pension Age.
Impact on lifetime allowance
If a client exercises their option to retire before age 50 under the above options, they will be subject to a reduction in their lifetime allowance of 2.5% for each complete year they take benefits before age 55.
Example – Mark was a footballer before A-day and retains a protected retirement age of 35. He elects to take benefits shortly after his 45th birthday. There are nine complete years before age 55, so he’ll be subject to a 22.5% reduction in his LTA. Any funds being crystallised above this figure subject to the appropriate LTA charges.
Ill-health early retirement
A member may take benefits at any age if they’re medically (physically or mentally) incapable as a result of injury, sickness, disability or disease of carrying out their current occupation, and have in fact ceased to carry on that occupation. The scheme administer must have received evidence from a registered medical practitioner that the member isn’t likely to be able to return to work before their normal retirement age.
The scheme rules may be stricter and require that the member cannot carry out any occupation, not just their own occupation. In addition, an ill health pension may stop or be reduced if the member recovers and is capable of returning to work.
Schedule 28 to FA04 states that:
‘For the purposes of this Part the ill-health condition is met if:
(a)the scheme administrator has received evidence from a registered medical practitioner that the member is (and will continue to be) incapable of carrying on the member's occupation because of physical or mental impairment, and
(b)the member has in fact ceased to carry on the member's occupation.’
As such, the member needs to have an occupation to be able to be incapable of, or cease, that occupation. So people who have never had an occupation, even if they are suffering from ill-heath, are unlikely to be able to exercise this option.
The taxation situation on ill-health early retirement is the same as standard benefit crystallisation.
Finance Act 2004 Schedule 28 paragraph 1
Finance Act 2004 Chapter 3 s165(1)Pension rule 1
Serious ill-health lump sum
Benefits may be commuted to a lump sum at any age if:
a registered medical practitioner provides written evidence that the member will live for less than 12 months
for payments made before 16 September 2016, the member no longer has any entitlement to benefits under the arrangement and that arrangement had never crystallised or paid any benefit
for payments made on or after 16 September 2016, the payment extinguishes all uncrystallised rights under the arrangement.
Before 6 April 2011 the member had to be under 75 to receive this lump sum. Now the tax treatment differs where the payment is before or after 75. The taxation treatment of serious ill-health lump sums varies significantly from other benefit crystallisation events.
Before age 75
Serious ill-health lump sums are paid tax-free
The member must also have available lifetime allowance when the payment is made
After age 75
The lump sum is taxed as pension income at the member’s marginal rate
The lump sum does not count towards the lifetime allowance as the final LTA test happens at age 75
There must be available lifetime allowance, this is calculated in the normal way but ignoring the 'age 75 BCEs'.
Finance Act 2004 (as amended by the Taxation of Pensions Act 2014) Para 4 Sch 29 Part 1 s4, s205A, 'Event 6' Para 15, Sch 32