In the 2014 Budget, George Osborne announced major changes to the way in which individuals would be able to access their defined contribution (DC) pension savings. The Government has now published its response to the consultation that followed, setting out in further detail the changes that will take effect from April 2015.
The current requirement to secure an annuity, scheme pension or drawdown pension from normal minimum pension age will be abolished. Individuals will instead have the option to withdraw their entire fund as a cash lump sum, subject to paying income tax at their marginal rate (rather than the 55% rate currently applied). This is a significant change, the announcement of which took the industry by surprise.
To give effect to this change, the Government has confirmed it will put in place a permissive (rather than mandatory) statutory override to allow schemes to take advantage of the improved flexibility without having to amend their scheme rules.
From April 2015, everyone with DC pension savings will be entitled to free and impartial guidance at retirement. The Government has confirmed:
- the guidance will be provided by organisations that are independent and have no actual (or potential) conflict of interest. In the first instance this will be through the Pensions Advisory Service and the Money Advisory Service;
- the Financial Conduct Authority will be given duties and powers to set standards and monitor compliance for those who deliver the guidance;
- both trust based and contract-based DC schemes will have a statutory obligation to “signpost” the availability of impartial guidance in their rules; and
- guidance will be available in a face-to-face meeting, online, or by telephone, at the individual’s choosing.
New legislation will be brought in to impose a levy on regulated financial services firms to fund the cost of the guidance service. What is not yet clear is whether sufficient funds are going to be put aside to pay for member guidance, whether the industry has the capacity to provide the guidance and whether the advice, brief and one off in nature, will be enough to properly guide individuals facing weighty decisions.
Defined benefit transfers
Transfers from unfunded public sector defined benefit (DB) schemes to DC schemes will not be permitted. However, except in respect of pensions already in payment, transfers between private sector DB and DC pension schemes may occur, subject to the following two safeguards:
- members who wish to transfer from a DB to a DC scheme must first take independent financial advice, for which the member will have to pay (unless he holds a small pot with pension savings below £30,000); and
- trustees will retain their existing powers to reduce transfer values in certain circumstances (new guidance from the Pensions Regulator will be issued to trustees reminding them of these powers).
It is also worth noting
- The normal minimum pension age will be increased from 55 to 57 from 2028 (so that it remains ten years below state pension age which is due to increase to 67 from the same date) – unlike the changes set out below, this seems to go against the policy of freedom and choice as pensions will remain tied up for longer, although it is understandable given the country’s increasing longevity;
- Members shall be permitted to transfer their benefits from one DC arrangement to another at any point up to their scheme’s normal retirement age (currently, scheme members can elect to transfer their benefits between DC schemes up to a year before their scheme’s normal retirement age);
- The Government intends to amend current legislation to allow annuity providers greater freedom to offer more flexible products (for example, by allowing annuities to decrease over their duration, permitting members to receive a lump sum in the future and extending the period for paying a deceased’s beneficiaries guaranteed annuity payments beyond the current ten year maximum); and
- Anti-avoidance rules will be enacted to ensure that the new flexibilities are not used by individuals as a means of tax avoidance.
There is likely to be a considerable amount of legislative and regulatory activity in the coming months if the new pension flexibility is to be ready in time for April 2015. Trustees and their advisors will, in particular, await further detail on the implementation and operation of the permissive statutory override and the guidance guarantee requirement for members.