UK Treasury plans to allow some people to retain a Normal Minimum Pension Age (NMPA) of 55 while others move to 57 risk creating a ‘hot mess' of complexity and confusion for savers, argues UK investment platform A J Bell.
Savers can retain the lower NMPA by opening a scheme offering an unqualified right to access their pension at age 55 by 5 April 2023.
Unwieldy proposals could be a gift to unscrupulous pension scammers and compromise other Government initiatives, A J Bell said.
Tom Selby, head of retirement policy at AJ Bell, said: "The Treasury has taken what should have been a simple reform and turned it into a hot mess of complexity.
"In attempting to provide ‘protection' for some people from the proposed rise in the minimum pension access age to 57, policymakers will cause outlandish confusion for savers.
"Everywhere you look there are holes and problems in these proposals. Perhaps most worrying is the risk that, by creating a two-tier pension access system, the Government will inadvertently open the door to scammers."
He added: "It is not too late to avoid this madness and we strongly urge the Treasury to step back from the brink.
"Furthermore, there is an alternative way forward which achieves the policy intention and is unbelievably simple - do away with the proposed protection regime and move everyone to a ‘Normal Minimum Pension Age' of 57 in April 2028."
AJ Bell highlighted "five big problems" created by the Treasury's NMPA plans
1.Scammers will use pension access age confusion to defraud savers
It doesn't appear that many personal pension schemes actually offer an unqualified right to access your pension at age 55, however this won't stop fraudsters trying to use the confusion to line their own pockets.
Scammers will create fraudulent scheme documentation which gives the impression that a protected pension age of 55 is held and use this to encourage savers to transfer to them.
It will be extremely difficult for someone to know whether or not the documentation is legitimate.
The last thing anyone needs is for the Government to create a new avenue for scams, which is exactly what this proposal will do.
2.Pension savers will face yet more complexity
Savers already have to navigate a pensions framework which is too complex, containing three different versions of the annual allowance, a lifetime allowance and myriad other ‘protection regimes' introduced down the years. The Treasury's plans will simply add to this, creating a ludicrous situation where someone could have two otherwise identical pensions with different NMPAs.
And it gets worse. Because people transferring pensions from a scheme with a protected pension age to a scheme without a protected pension age will be entitled to retain an NMPA of 55 only for the transferred funds, providers will be required to ‘ringfence' the transferred part of their retirement pot. This will mean savers will have a single pension containing some funds they can access from 55, and others where they need to wait until 57!
3.If mistakes are made, savers risk being hit with a 55% unauthorised payment charge
Given the level of complexity involved, there is a real risk a scheme someone is transferring from will mistakenly confirm the person has a protected pension age of 55, when in fact they should be moving to 57.
If this is found to be incorrect and the saver accesses their retirement pot before age 57, HMRC would almost certainly clobber them with an unauthorised payment charge of 55%.
4.The Treasury risks failing to achieve its policy objective
The policy intent of increasing the NMPA to 57 is to take account of life expectancy improvements. Over the longer-term, the Treasury has said it wants to keep a 10-year gap between the NMPA and the state pension age.
The state pension age is due to increase to 67 by 2028 and 68 by 2046 (although the Government has indicated the rise to 68 will be accelerated by 7 years to 2039).
By creating a protection regime for those who randomly have an unqualified right to an NMPA of age 55, policymakers are unnecessarily undermining the overarching aim of the reform.
Furthermore, the proposed protection rules would create a precedent for future increases in the NMPA. Providers are likely to adapt their scheme rules to ensure savers have an unqualified right to retain an NMPA of 57 from 2028 onwards - meaning future increases in the minimum access age will need to be implemented in yet another different way.
5.People will be encouraged to focus on accessing their fund at the NMPA
If the Coronavirus pandemic has taught us anything, it's that just because the Government says you can do something, it doesn't mean you should.
Whether your NMPA is 55 or 57, in most cases taking an income from this age would come with a high risk of not being sustainable.
Yet by focusing so much attention on this point in time, the Treasury risks giving people the impression they should be accessing their retirement pot in their mid-50s.
A J Bell further picked out three Government initiatives "compromised" by the Treasury's NMPA plans:
The aim of Pensions Dashboards is to show people the total value of their retirement income at their chosen retirement age. If someone has a chosen retirement age of 55, but can only take some of their pensions at that age, with the rest not available until 57, how will that projected income be shown on Dashboards? Pensions Dashboards are currently being designed around people having a single retirement age.
2. Small pots consolidation
The Government is looking at how to address the issue of people ending up with lots of small pension pots, something that has been amplified by auto-enrolment. One option is for schemes to have to consolidate multiple pots into one. If a small pots scheme has a protected pension age of 57 and providers have to consolidate small pots into it which have a protected pension age of 55, it will create a ‘mix and match' access age for people with the very lowest level of understanding of pensions.
3.Simpler annual statements
The Government is proposing to require pension providers to introduce simpler annual benefit statements to improve people's understanding of their pension savings. However, these are meant to be based on a particular selected retirement age. If someone can only access part of their pot from that selected retirement age and must wait a further two years for the rest, they're going to need two different statements. Far from simple.
In separate news, A J Bell also highlighted new research showing that more than one-in-three people aged between 50 and state pension age (66) would consider taking their state pension early at a lower rate if the option was offered.
The independent survey of 1,071 people aged 50 to 66 was carried out by findoutnow on 2 September 2021.
Tom Selby, head of retirement policy at AJ Bell, said: "Increases in the state pension age - particularly those that affected 1950s-born women - have been hugely controversial in recent years and sparked debate about the fairness of the current system.
"In particular, significant differences in life expectancy in different parts of the country have led to concerns the least well off are losing out. For example, according to official data someone born in Blackpool can expect to live, on average, a decade less than someone born in Westminster**.
"Allowing early state pension access at a reduced rate would potentially help address this unfairness. What's more it could be popular, with more than a third of people aged 50 to 66, the current UK state pension age, saying they would consider this if it was offered as an option by the Government. Offering this option could also be cost neutral for the Treasury over the long-term.
"However, enabling early access would add extra complexity to the system and might result in people choosing to get their state pension as early as they can, without considering the impact on their retirement plans over the longer-term.
"This could also have implications for the Treasury, which would potentially face a short-term cashflow problem if lots of people decided to take their state pension before age 66."