Simplicity is arguably the most important ingredient for any successful pension system. Simplicity aids understanding, which drives engagement, and ultimately leads to materially better outcomes for people in their retirement years.
It will come as no surprise to say that the UK’s pension system suffers from a chronic lack of simplicity. The myriad of rules, regulations and technical jargon have given us a system that is virtually impossible for savers to navigate on their own.
In my view, this complexity explains why so many people seem so disengaged with their pension and try to avoid at all costs having a conversation with someone about it. Perhaps this also explains why Pension Wise guidance remains at worryingly low levels.
Advisers see these frustrations in clients each and every day. Clients generally come with reams of questions about their pension. Some quite simple, others a minefield of complexity.
This complexity explains why so many people seem so disengaged with their pension And now the most basic question of them all (the date they will be able to access their pension) is going to become exponentially harder to answer.
The government’s recent proposals for increasing the normal minimum pension age – the age at which people can access their pension without incurring an unauthorised payment tax charge – will create a regime where there is not one, but four potential age regimes at which someone can access their pension, depending on whether a protected pension age applies.
In previous NMPA hikes, the government has limited the protection regime to certain public sector pension schemes where there is clear justification for allowing that individual to maintain their pension age, such as for firefighters, for example.
But now the protection will also apply to all HMRC-registered schemes, should that scheme confer an unqualified right for the member to take benefits earlier than the age of 57, based on the interpretation of the scheme rules.
Some will still be able to access their pension before age 50, although the number falling into this bracket is fairly small now. Some will be able to access it at 50 if they were covered by the protection regime when the age was last increased in 2010.
Some will retain the age of 55 if they are given a protected pension age under the new regime proposed. Many others will have to wait to the age of 57 if they do not enjoy any protections.
What complicates things even more is the fact that in certain circumstances the age does not apply to the scheme rights as a whole, but to certain elements of it. Someone may well have one or two NMPAs across their various pension pots, and someone could even have a single retirement pot in which only part can be accessed at age 55 and another part at age 57.
And there will be an additional layer of complexity in the decades ahead when a fifth NMPA will be added to the mix when the government increases the age yet again, potentially with another complicated protection regime.
Adding this additional layer of complication makes the job of planning for retirement exponentially harder. Not only does it make the process of figuring out how much you will need to take, and when, a lot harder, but introducing this significant complexity runs the risk that savers will simply disengage altogether.
It is not too much of a leap to think that someone so frustrated with the countless rules just gives up on their pension entirely and takes it all out to put it in a bank account once they are able to access it.
And when pension dashboards are launched (which ultimately aim to support better planning in retirement), having various NMPAs could well make the information presented confusing and hard to follow, and in fact may limit their eventual benefit.
Nobody is questioning whether the NMPA should actually go up. People are living longer, and with the increase in the state pension age, an increase in the NMPA alongside it is necessary to reduce the risk that savers run out of money in retirement.
But the way in which the government wants to do it will add fuel to the fire in an already complicated pension system.
The Association of British Insurers is calling for everyone to be able to access their private pension at 57 years old with some limited exceptions, and this seems like a sensible approach.
Back in 2010 when the NMPA was last increased the protection regime was only applied to occupational schemes where there was a clear reason for someone needing the money at an earlier stage linked to the nature of the individual’s employment.
This is the principle the government should stick to, otherwise they will bake in complications to the pension system for decades to come.
Gemma Harle is managing director at Quilter Financial Planning
