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State Pension Age Changes (Bridging Pensions)

Volume 542: debated on Monday 26 March 2012

Some defined benefit occupational pension schemes pay members who retire before state pension age a higher pension at the outset, which is then reduced at state pension age to take account of the payment of state pension. This allows a member’s total retirement income to be smoothed over the period of retirement, alleviating possible financial hardship between the date of retirement and the payment of state pension.

These arrangements are often described as bridging pensions, but they are also referred to by other terms, including, integrated pensions, step-up pensions, claw-back pensions and state pension offsets. They can either be part of a scheme’s basic design, or an option offered to members at retirement of either a bridging pension, or a level pension from the outset. Where there is an option the amount payable after age 65 will be lower if a member has opted for a bridging pension, so that the overall cost to the scheme will generally be calculated to be the same whichever option is chosen.

The Government are aware that the changes being introduced to state pension age may have implications for some pension schemes which provide bridging pensions, and individuals who are receiving them. And we recognise that some changes to legislation will be necessary in order to take account of the changes to state pension age. In particular, the Finance Act 2004 places an upper age limit of 65 on the payment of bridging pensions.

At Budget 2012 the Government announced that changes would be made to the Finance Act 2004 to align the bridging pension rules with the state pension age changes.

We recognise that the rules of some schemes providing bridging pensions may specifically refer to the current 65 upper age limit and that in some cases the rules may not provide for their terms to be amended easily, or even at all. They could then be in a position where they are unable to adapt the terms on which their scheme provides bridging pensions in order to take account of changes to state pension age.

I therefore propose to introduce a limited power for the trustees of schemes which currently provide bridging pensions within the terms of the Finance Act to amend their scheme’s rules (if they wish to do so) to take account of later state pension ages. This will allow trustees to adapt the terms of any bridging or integrated pension arrangement offered, but only to the extent that they consider this to be necessary or desirable in order to take account of the changes to state pension age and to the Finance Act. It will not allow them to make wider or more general changes.