Don’t let Easter get in the way

Nigel Orange highlights the urgency of getting in touch with clients to warn them of the impending change in minimum retirement age

If you are involved in the pensions market and do not want to be accused of neglecting your clients’ interests, there is something that you must warn a certain section of your retirement planning clients about before the end of this tax year. As we will see that does not mean the Monday 5 April. Because of the way that Easter falls this year, you must warn the clients concerned to act before Thursday 1 April.

The issue that should be raised is that of the increase in the minimum retirement age from 6 April 2010. From that date, except for special occupations, the normal minimum pension age is 55 years. The stated reasons for the increase in public and personal pension ages is as a method of “dealing with the pressure which increased longevity exerts on both state and private pension funding”¹ and because “Government policy is to encourage greater participation in the labour market by older workers”².

The ABI have consulted with pension and annuity providers to agree a practical deadline for the receipt of complete and accurate applications. This is Monday 1 March at 5pm and hopefully this should help reduce administrative problems and ultimately avoid clients missing the 6 April deadline.

It should be quite easy to track them down, assuming your records are well organised, because the people you need to contact are those with pension plans or directors’ pension arrangements, who were born between 6 April 1955 and 5 April 1960.

While it also affects people in employer’s schemes in theory, as they usually do not have control of their own retirement date it may not make any difference to them. If they have a free-standing AVC however, it might be worth raising it with them.

It is indisputable that the UK population is ageing. Official figures³ show that over the last 25 years, the number of people aged 65 increased by 1.5 million. By 2033, nearly one quarter of the population (23%) will be aged 65 and over, compared to 18% aged 16 or younger.

And the ‘oldest old’ as they are known – those aged 85 and over – has seen the fastest population increase in the UK.

So the issue of when someone retires and how they will pay for their increasing length of time in retirement is one of the most important financial decisions someone can make.

Pension planning is a complex area and advisers can play a crucial part in helping clients make the right decision for their circumstances. So when it comes to the issue of the increase in retirement age to 55, how can advisers help the clients affected cope with this change?

Implications

Firstly, let us assess the implications for a client missing the opportunity to vest their pension plan before age 55:
• They may have to wait for up to five more years before they can take an annuity
• They may have to wait for up to five more years before they can take a pension commencement lump sum (PCLS)
• They may have to wait for up to five more years before they buy an annuity from their drawdown arrangement

So if a client aged less than 55 wants to take advantage of any of these, they must act as soon as possible. And be assured that people are already taking action: Standard Life has reported that “we have seen a short-term increase in activity levels as some customers take retirement benefits ahead of the minimum age increasing...”⁴

So you had better get in contact with your clients before someone else does! But what are you going to advise them to do? Here are some reflections on each of the points raised above.

Does the client really need the annuity income now? After all, the annuity rate for someone in their early fifties is not going to be terrific. What happens if their personal situation changes or inflation takes off? Surely it would be better for them to wait and keep their options open and use drawdown or flexible annuities when they reach age 55?

Alternatives

If receiving an income is crucial, perhaps even a five-year temporary purchased life annuity (bought with tax-free cash) might be a worthwhile alternative?

There is more of an argument for taking the tax-free cash under drawdown, with a zero unsecured pension. This sets up all sorts of possibilities for effective use of the money; whether it be repaying mortgages early, buying a retirement property while prices are low or another purpose.

Be careful that this exercise will still leave the client with sufficient funds to generate their retirement income when the time comes.

You may have thought that because the PCLS had been taken from a drawdown arrangement after age 50, there would be no issue with then buying an annuity.

Not so, because from 6 April, this may* not be allowed if the client is still under age 55! So if an annuity is going to be crucial before age 55 for these clients, they should draw a pension of some sort before the end of the tax year.

One should also remember that in many cases it will be possible to phase these activities, or the client will have more than one pension plan, so it does not have to be an ‘all or nothing’ decision.

Timing is crucial

Timing is also crucial because, as mentioned earlier, of the timing of Easter. Easter Friday is the 2 April 2010 and Easter Monday is 5 April. So the effective last working day of the tax year is Thursday 1 April 2010. So how will this affect clients who are 50 at that time?

As HMRC says: “this may present difficulties”, but to their credit they are being magnanimous. They have said that for these people they will accept that if their actual 50th birthday arises on 2 April, 3 April, 4 April or 5 April 2010, the crystallisation can occur on Tuesday 6 April and will be treated as having occurred on their 50th birthday.

This is one of several factors of which advisers should be aware, and for your convenience short details are listed below.

Some people will still be able to retire before age 55
• from 6 April, pension benefits can still be taken under the age of 55 if the member has a protected pension age (see below) 
• the member takes benefits on ill health
• claiming the transferable nil rate band requires complex documentation
• the transferable nil rate band can only provide a maximum of twice the current nil rate band at the point of second death, assuming the spouse or civil partner did not use their allowance.

Protected pension age
This term is used to describe a situation where, as at 5 April 2006, an individual had a right to take pension benefits from:
• an occupational pension scheme before the age of 55 under a scheme rule in force on 10 December 2003
• from a personal pension scheme or retirement annuity contract before the age of 50 and the individual was in a certain prescribed occupation

Pension date
To determine which age is to apply to pension payments, HMRC looks at the point at which
• in the case of income withdrawal, sums or assets are designated as available for the payment of unsecured pension
• or in the case of any other type of pension, the member first has an actual right to the payment of a pension.

It is not necessarily the same as the date the first pension instalment is paid over.

Pension commencement lump sum
The PCLS must be paid within the period starting six months before and ending 12 months after the day on which the member became entitled to it and it is the point of pension entitlement which sets the PCLS payment window. The lump sum cannot be treated separately from the relevant pension to which it is linked and, accordingly, the same pension age must apply to both.

Pensions in payment
For the absence of doubt, HMRC has confirmed that if a client starts to take their pension from age 50 before 6 April 2010, but they are not age 55 until after 6 April 2010, that pension can still be paid.

But if the member wishes to crystallise further benefits after 6 April, for these to be authorised payments the member must have reached the age of 55.

Unsecured pension
Entitlement to an unsecured pension specifically arises whenever sums are designated to be available to pay an unsecured pension. However, because there is no minimum income requirement, the first income payment might not actually be drawn for some years.

Lifetime annuity
Until the purchase price is passed to the insurance company, there is no certainty that the annuity will actually be paid.

So actual entitlement to the annuity occurs when the insurance company accepts payment of the premium and is bound to pay out the annuity from a specified start date. The date on which payment was effectively made for the purchase of the annuity, becomes the date of ‘actual entitlement’.

Ill health
If the rules contain the relevant provisions, medical evidence has been obtained from a registered medical practitioner and the member is either:

• incapable of carrying on their occupation because of either mental or physical illness or other such impairment
• suffering from serious ill health, which means the member’s expectation of life is less than one year
• the member’s pension entitlement, may be paid before normal minimum pension age.

*HMRC are still considering this point

Sources
¹House of Commons Library 
www.parliament.uk/commons/lib/research/briefings/snbt-02234.pdf
²HMRC
www.hmrc.gov.uk/pensionschemes/min-pen-age.pdf
³Office for National Statistics
www.statistics.gov.uk/cci/nugget.asp?ID=949
⁴Standard Life
http://ukgroup.standardlife.com/content/news/new_articles/2010/sl_Q4_2009_results.xml

Nigel Orange is technical support manager at Canada Life