Pension before age 55

reflexive

Dear MSE board,


My name is Stefan Lucas and i am student of the University of Tilburg. I am writing my master thesis about when to recognize pension as income in countries with the EET-system. To answer that question i am looking into the pensionsystem of the United Kingdom and the Netherlands.


- Is it possible to pay out or pawn the pension entitlement before the age of 55 ? I found out in the Finance Act you get charged with unauthorised payment. But what about the Pension Act? Is there any law that forbids the pensionprovider to pay out the entitlement before the age of 55 to the participant of the pensionscheme ? If yes, can you explain me how this works ? And if not, does the participant have the power during the entire phase of the entitlement ?


The answer of this question is essential for my research to understand the British pension system and when to recognize pension as income in the UK.



Thank you in advance.



Kind regards,

Stefan Lucas

worried_jim

If you have an illness with a terminal diagnosis the pension can then be claimed before age 55.

reflexive

Thank you for your answer, what's the legal base for this concept ?
Where in the law i can find that it's not possible to access your pension before age 55 except for illness ?

PensionTech

Can you explain why you think the Finance Act isn't enough and the Pensions Act also needs to prohibit such payment?

Most pension benefits cannot be paid before age 55. There are a few exceptions: ill-health pension benefits may be paid earlier, certain pension schemes have protected terms so that they can pay out from age 50 (though these are dwindling as we get farther from the original legislative change from 50 to 55), and pension schemes for certain, very limited occupations may be able to have an earlier retirement age.

Paying a pension benefit before age 55 is classed an unauthorised payment (as you know) and incurs heavy tax charges for both the scheme and the recipient. (Failure to pay these charges would, of course, be breaking the law.) Moreover, if a pension scheme does make unauthorised payments, in extreme cases (e.g. where it appears that the scheme routinely makes unauthorised payments and is set up with a purpose of making unauthorised payments), the scheme can have its registration status revoked, which also carries heavy tax charges. (You can read more about de-registration here: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm033000.) Trust-based schemes that make unauthorised payments could fall foul of trust law and be subject to legal action as a result of that too.

In short, the combination of punitive tax charges and potential regulatory action mean that pension benefits are not paid before age 55 in the UK other than in exceptional circumstances such as ill-health.

PensionTech

Where in the law i can find that it's not possible to access your pension before age 55 except for illness ?

The Finance Act 2004. Section 165 says that a pension may not be paid to a member under the normal minimum pension age unless the ill-health condition is met. Section 279 sets out the normal minimum pension age as being 55. Schedule 36 contains some other transitional provisions that relate to protected pension ages, as I alluded to earlier.

reflexive

Thank you for your useful contribution.
The reason i think the Finance Act isn't enough lays in the legislation of my own country, the Netherlands. In short, we have in our Finance Act something similar like unauthorised payment. But our Pension Act forbids the pensionprovider to pay out the pension to the participant. As result we can't recognize the pension entitlement as income during the 'working' phase.

As i understand now, thanx to your contribution, it lays in the British Finance Act that the scheme itsself also get charged when they pay out pension to the recipient and that they can lose their registration.

What about the possibility to pawn the pension entitlement before the age of 55 ? The same rules for unauthorised payment apply?

reflexive

PensionTech wrote: »

The Finance Act 2004. Section 165 says that a pension may not be paid to a member under the normal minimum pension age unless the ill-health condition is met. Section 279 sets out the normal minimum pension age as being 55. Schedule 36 contains some other transitional provisions that relate to protected pension ages, as I alluded to earlier.

Thank you very much, this is very useful for me.

PensionTech

What about the possibility to pawn the pension entitlement before the age of 55 ? The same rules for unauthorised payment apply?

There is no such facility here. The Pensions Act 1995 (section 91) prohibits any kind of assignment, forfeiture, surrender, lien against a pension entitlement - i.e. once a member has a pension he cannot give up any rights to it (and nobody can force him to do so). This means that you cannot enforce any kind of loan etc. against a pension benefit - so you cannot "pawn" it. The only exception to this is in the case of divorce, where ex-spouses can be awarded a share of the member's pension, and debt to the scheme or scheme sponsor (I forget which), which can be deducted from pension benefits if needed (but this is very rare and is usually only used in cases where a benefit has been overpaid and must be reclaimed from the member's remaining entitlement to his pension).

reflexive

PensionTech wrote: »

There is no such facility here. The Pensions Act 1995 (section 91) prohibits any kind of assignment, forfeiture, surrender, lien against a pension entitlement - i.e. once a member has a pension he cannot give up any rights to it (and nobody can force him to do so). This means that you cannot enforce any kind of loan etc. against a pension benefit - so you cannot "pawn" it. The only exception to this is in the case of divorce, where ex-spouses can be awarded a share of the member's pension, and debt to the scheme or scheme sponsor (I forget which), which can be deducted from pension benefits if needed (but this is very rare and is usually only used in cases where a benefit has been overpaid and must be reclaimed from the member's remaining entitlement to his pension).

That's sounds as a logic explanation, to be sure that the pension entitlement will be used for pension and not for any other reason.

Something i came up with now. Let's say i am 45 years old and i want to pay out my pension entitlement. I will get charged with an unauthorised payment, and also the scheme get's charged. Does the scheme have the power to prohibit the pay out ? So that the recipient needs permission from the scheme for the pay out because i can understand the scheme doesn't like this extra income tax. And from your information i understood that the scharge for the scheme not always can be reduced.

PensionTech

Does the scheme have the power to prohibit the pay out?

Yes. Schemes only have to pay benefits in line with their own scheme rules/contract conditions and the wider legislation. Neither of those will include a facility to pay benefits before age 55 - indeed many scheme rules specifically include clauses saying that the scheme may not make any payment that would be classed as unauthorised. Sometimes members do request payments knowing they will be unauthorised payments and incur massive tax charges (I've seen people on here asking about it, although I've never worked on a scheme where a member has made such a request - I think it must be a very rare occurrence). The scheme is entirely within its rights to reject the request, and I don't think any legitimate scheme would ever grant it.

reflexive

That makes thing clear, so when its not included in the scheme's contract conditions the scheme would never participate with the pay out. No scheme would include that facility because it would charge extra to the scheme itsself aswell.
Thanx alot for your knowlegde and accurate answer, it will help me alot with my thesis!!