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The difference an age change makes
The normal minimum pension age changed from 50 to 55 on 6 April 2010. Surprisingly, this can affect customers already in drawdown on 5 April 2010 who are under age 55.
Key points
- Income payments following a change of drawdown provider for a customer who is under age 55 will be unauthorised.
- Payments from an annuity purchased from 6 April 2010 for a customer already in drawdown who is under age 55 are unauthorised payments.
How are the under 55s affected?
They are affected if they want to change their drawdown provider and take an income, or purchase an annuity.
Change of drawdown provider
A change of drawdown provider for customers who are under age 55 can result in any income payments taken from the new arrangement being treated as unauthorised. Trying to understand why is a bit tricky, but here’s our explanation.
HMRC confirmed in Newsletter 37 that a protected low pension age could only be kept for drawdown transfers if that transfer was a ‘block transfer’. If the transfer isn’t a block transfer the protected low pension age will be lost. They also confirmed that where a protected low pension age is lost any income payments made under the new arrangement before the normal minimum pension age will be unauthorised payments.
Customers who went into drawdown before reaching age 55 don't have a protected low pension age. They just took their benefits at an age they were allowed to before 6 April 2010. For this reason, on change of drawdown provider any income payments taken from the new arrangement will be treated as unauthorised payments.
Income payments from an existing arrangement are allowed, as confirmed by HMRC in Newsletter 38. Here’s what it says:
“1. Where a member starts to take benefits after reaching the NMPA of 50 before 6 April 2010 but they are not yet age 55 by 6 April 2010 those benefits can still continue to be paid after 6 April 2010 as authorised payments.”
Purchasing an annuity
Purchasing an annuity from an unsecured pension fund, a drawdown fund, is what’s known as a benefit crystallisation event (BCE). It’s BCE number four, out of the ten BCEs that exist. A BCE is an event that triggers a test against the amount of lifetime allowance someone has left. Any BCE has to be tested against the normal minimum pension age. Customers now have to be aged 55 or over to purchase an annuity, unless they are in ill-health or serious ill-health or have a protected low pension age. For this reason, payments from an annuity purchased from 6 April 2010 for a customer who is under age 55 are unauthorised payments.
HMRC's stance
HMRC has confirmed the position as we’ve outlined above. It's aware of the practical difficulties that this creates following representations from the industry. Its policy team are looking at these issues and will advise further once they have reached a conclusion. No timescale is available as to when we can expect clarification.
Our view
It’s disappointing that HMRC are adopting a very literal interpretation of these rules. The age change from 50 to 55 is a one-off event and as such we’d expect there to be some leeway granted to cater for cases like this. You could even argue that the restriction on changing drawdown providers is a barrier under the FSA’s TCF outcome 6 (1). But, until HMRC confirm any leeway (and if they actually do), the rules are as we’ve explained here and great care should be taken with customers who are in drawdown and under age 55.
Scottish Life will not currently accept drawdown transfers where the customer is under age 55, or set up annuities for drawdown customers under the age of 55.
(1) FSA’s TCF outcome 6: Customer’s do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.
Published 18 May 2010
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