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HMRC internal manual

Pensions Tax Manual

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Member benefits: pensions: protected pension age: right to take benefits before normal minimum pension age of 55

 

Glossary PTM000001
   

 

Right to take pension and/or lump sum benefits before normal minimum pension age
Occupational and public service pension schemes: members with a right to take benefits before age 55
What is meant by an unqualified right to take benefits
Reporting the benefits before normal minimum pension age to HMRC

Right to take pension and/or lump sum benefits before normal minimum pension age

Paragraph 21 to 23 Schedule 36 Finance Act 2004

Individuals who take a pension and/or lump sum benefits from a registered pension scheme before the normal minimum pension age are liable to a tax charge, unless they are in ill-health, see PTM062100. The normal minimum pension age is and has been 55 since 6 April 2010.

There is an exception for some individuals who, on 5 April 2006, had an unqualified right under their scheme’s rules to take a pension from an age less than the normal minimum pension age. Where certain conditions are met (see below and PTM062220), these individuals may still take benefits at an age earlier than the current normal minimum pension age without incurring an unauthorised payments tax charge. The earliest age they can do this is known as the member’s protected pension age.  

Where an individual meets the conditions for a protected pension age, the scheme administrator will be able to tell the member if their right to take benefits has been protected in the scheme. There is no requirement for the member to register this protection with HMRC.

Where a member has a protected pension age, the tax rules provide that the protected pension age replaces the prevailing normal minimum pension age for all purposes of the pensions tax legislation with one exception.  That is where the member’s lifetime allowance reduces if the protected pension age is less than 50 and benefits are taken before normal minimum pension age (see PTM082000). So, with that one exception, when taking benefits from the relevant registered pension scheme, the tax rules apply to the member on the basis of their protected pension age rather than the prevailing normal minimum pension age.

Where the conditions are met, the protected pension age then applies to all benefits the member can take under the scheme including benefits to which the member does not have an unqualified right (see below), new benefits introduced after 5 April 2006 and any benefits in respect of a transfer into the registered pension scheme. 

For the protected pension age to apply, the member’s entitlement to all their benefits under the registered pension scheme (disregarding any benefits to which they were actually entitled on or before 5 April 2006) must arise on the same day.

Individuals must keep to certain other conditions if they are to keep their right to a protected pension age. PTM062230 gives more information on these conditions.

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Occupational and public service pension schemes: members with a right to take benefits before age 55

Paragraph 21 and 22 Schedule 36 Finance Act 2004

For a member of a registered pension scheme to have a protected pension age, the following conditions must be met:

  • the member must have had the right on 5 April 2006 to take a pension and/or lump sum at an age below age 55,
  • that right must be unqualified (in that no other party need consent to the individual’s request before it becomes binding upon the scheme or contract holder),
  • the provision to pay benefits before age 55 must have been set out in the governing documentation of the retirement benefit scheme or deferred annuity contract (for example, a section 32 policy) on 10 December 2003, and
  • the member must either have:
  1. had an unqualified right under the scheme or contract on 10 December 2003, or
  2. acquired the right in accordance with the scheme provisions as they were on 10 December 2003 upon joining the scheme after that date.

See below for more information on what is meant by an unqualified right to take benefits.

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What is meant by an unqualified right to take benefits

An individual has an unqualified right to take benefits if they do not need the consent of anybody before they can take their benefits. If the scheme documentation states that the consent of the trustees or employer is required to take benefits the member does not have an unqualified right to take benefits. (It does not matter that the trustees have always operated their discretion to allow the payment of early benefits, the right is still not an unqualified right.)

For example, on 10 December 2003 a scheme may give its members an unqualified right to take pension benefits before age 55, but only if they are active members. Deferred members may take benefits before age 55 but only with the consent of the trustees or the employer. The active members as at 5 April 2006 who were also active members on 10 December 2003 or who joined the scheme after that date therefore have a protected pension age but the deferred members do not. On or after 6 April 2006, the employer decides that it will close its defined benefits section in the scheme and instead in future will provide benefits on a defined contributions basis in a new section of the existing scheme. As a result those members who were active members of the defined benefits section on 5 April 2006 become deferred members of that section and active members of the defined contributions section (with a reserved right, qualified or unqualified) to take benefits before age 55. However, these members still retain their protected pension age as this is unaffected by any changes in scheme rules made from 6 April 2006 onwards. So they are still able to take their benefits before age 55 after 2010 provided that consent to taking the deferred benefits (and their defined contribution section benefits if the right to them is qualified) is given and that they become entitled to all their scheme benefits under both the defined benefits and defined contributions sections on the same date.

Similarly on 10 December 2003 a scheme may not allow active members to take benefits early without trustee and/or employer consent but give deferred members an unqualified right to early payment of benefits from age 50. If an individual leaves pensionable service and becomes a deferred member in accordance with the scheme rules and exercises their right to take benefits before age 55 they will have a protected pension age. No protection will be given to those who are not deferred members, as they have not met the condition that allows them an unqualified right to take benefits.

Some rules give members an unqualified right to take benefits but only when a certain contingency occurs. It is only when the contingency occurs that the rules of the registered pension scheme give a member the unqualified right to take benefits before age 55 and that they will have a protected pension age. So unless and until the relevant contingency actually occurs in respect of them, the members do not have a protected pension age.

For example, on 10 December 2003 a scheme may give its members an unqualified right to take pension benefits before 55, but only if they are made redundant. If any members are made redundant after 5 April 2010, are aged over 50 but under 55 and exercise their right to take pension benefits, they will have a protected pension age and will not be liable to a tax charge.

Where members of an occupational or a public service pension scheme have a protected pension age of less than 50 then they may have a reduction in their lifetime allowance. See PTM082000.

Reporting the benefits before normal minimum pension age to HMRC

The scheme administrator must report to HMRC any payment of benefits before normal minimum pension age from an occupational pension scheme on the Pension Schemes Online Service using the Event Report procedure, if in the tax year that benefits were provided or in any of the preceding 6 tax years the member was:

  • in relation to the sponsoring employer or an associated company of that employer, a director or person connected with a director
  • either alone or with others, the sponsoring employer, or
  • a person connected with the sponsoring employer.

The meaning of ‘connected with’ is explained at PTM027000

PTM161300 sets out the information that needs to be submitted via the Event Report.