Calls for the government to increase the normal minimum pension age (NMPA) and to cap tax-free pension lump sums have received a mixed industry response, with industry experts warning against a “knee-jerk reaction” to the rise in economic inactivity.

A report from the Resolution Foundation suggested that the government should “broaden out from narrow discussions" on raising the state pension age (SPA) to consider private pension policy choices that impact on early retirement decisions.

In particular, the report argued that the current plans for the NMPA to rise to 57 from 2028, therefore remaining ten years below the state pension age, will support early retirement only for wealthier individuals.

In light of this, it suggested that policy makers should consider further raising this age, or at least slowing the rate at which money can be withdrawn before SPA.

Alongside this, the foundation recommended that policy makers cap tax-free lump sums, arguing that the existing system, whereby 25 per cent of all private pension income can be taken with no tax due up front, encourages early retirements far before the SPA for wealthy individuals at "considerable expense" to the taxpayer.

"Policy makers can learn from other countries about how to make this work without increasing poverty and hardship: for example, exceptions could be made for those with long-term health problems (as is already the case in the UK), or at risk of entering poverty," it stated.

Reflecting on the proposals however, LCP partner, Steve Webb, argued that "whilst the desire to make later life work more rewarding is laudable, this should not be at the expense of yet more incremental tinkering with the pension system".

"In particular, the idea of hiking the minimum age at which people can access their pensions would be a backward step," he stated, continuing: "The existing plan to raise the age to 57 is already adding to the complexity of the system and further increases would add more complexity with no obvious benefit.

"There are some people who have retired early during the pandemic but this will often be combined with a secure final salary pension and changing pension rules for defined contribution (DC) schemes will not affect this group.

"Any changes to pension rules need to be justifiable for their own sake and not a knee-jerk reaction to the rise in economic inactivity”.

Adding to this, AJ Bell head of retirement policy, Tom Selby, argued that "randomly increasing the NMPA beyond 57 makes little sense", noting that while there is no ‘right’ answer for setting the minimum access age, the current approach "at least maintains a link with life expectancy", as well as giving savers flexibility to access their pension to suit their needs and personal circumstances.

Selby also raised concerns around the proposals to cap pension tax-free cash. arguing that this is "all-too-often pushed as a solution to problems facing government", but could risk being "complex, ineffective and fundamentally undermining incentives to save for retirement".

He stated: “If pension tax-free cash were to be further restricted – it is of course already limited by the lifetime allowance – serious consideration would need to be given to managing the transition from the current system to a reformed system.

“The Resolution Foundation report makes no mention of this transition – or indeed the level at which the cap should sit – and yet it would be absolutely critical in determining the overall impact of the policy. It also doesn’t say anything about the potential consequences to retirement saving incentives that would flow from this policy.

“If the Chancellor used his March Budget to announce a tightening of pension tax-free cash restrictions, he would need to set out what would happen to existing entitlements.

"Millions of Brits have agreed to lock their money in pensions for decades in part because they were told they could get a quarter of their pot tax-free when they reach the minimum access age, which is currently set at 55.

“Any new limit on tax-free cash would, presumably, therefore need to ensure tax-free cash entitlements linked to contributions already paid in are protected. If this didn’t happen, then trust in retirement saving could be fatally undermined. As a result, we would move to a complex two-tier system, with any impact on the labour market and Government finances unlikely to be realised for decades."

Instead, Selby reiterated calls for the government to increase or remove the Money Purchase Annual Allowance (MPAA), arguing that this "roadblock to saving for retirement in place runs directly counter to stated government policy".

“As a minimum, the Chancellor should increase the MPAA to £10,000, the level it was originally established at," he added. "However, over the medium-term the Treasury should consider whether the MPAA is necessary at all.”

Despite the pension focused recommendations, the Resolution Foundation's report also emphasised the need to look more broadly to address concerns around economic inactivity, arguing that getting retirees back into the workforce may not be the best solution.

“We need to reboot progress on getting people into work, but we’re not going to achieve it by persuading the recent Covid cohort of older workers to ‘unretire’," Resolution Foundation economist, Louise Murphy, stated.

“Britain did a great job of getting more people into work in the 2010s. But some of that progress has been undone by the pandemic, with economic inactivity rising by 830,000 over the past three years.

“Instead, we need to do more to encourage mothers in low-income families into work, and help people who need to take periods of time-off for ill-health stay attached to their jobs.

“Taking the right approach to workforce participation would boost individuals’ living standards, and improve the wider health of our economy.”

Indeed, this also follows recent research from LCP, which showed that despite claims of a 'great retirement', the increase in the number of those in retirement has been outweighed by the increase in working aged Brits that have become economically inactive due to long-term sickness.

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