Okay, I just called the Embassy in London. After the usual automated menu (choice 7 takes you to an immigration officer) I enquired after my passport which is not yet expired. I was told that while I will have to switch to the new machine-readable type, the embassy has not yet started issuing these and they are advising all citizens to call once per month to find out about the status.
On the other hand, Punk's passport is expired (children only get 5 years on their passports) and that an automatic extension will be granted. All I have to do is submit an application extension form, a fee of £5 to cover return postage and her passport will be renewed.
Sounds trouble free so far, right? I'll let you know how that works out.