Earlier this week Chancellor George Osborne delivered the 2014 budget. This included a series of noteworthy changes to defined contribution (DC) pensions; so noteworthy in fact, that the reform was described as the “most fundamental reform to the way people access their pensions in almost a century”. Despite these changes coming as welcome surprises for most, the announcement did trigger a sudden fall in share prices of insurance companies.
We will be summarising the significant changes in two blog posts. Part 1 will focus on the options for accessing DC pension savings.
Beginning April 2015, changes will be implemented to allow much greater flexibility for DC members. They will have the choice to draw down their pension pots without any limits once reaching retirement, which effectively removes the requirement for members to purchase an annuity. Notwithstanding the 25% tax-free pension lump sum at 55, which will continue to be available, any cash lump sums or unrestricted drawn downs will be subject to income tax at the member’s marginal rate.
This merely removes the requirement for members to purchase an annuity on retirement and does not prevent members opting to buy one. With this degree of flexibility given to members, their investment strategies are likely to reflect this. Therefore the Government has stated that pension providers and trust based schemes must provide free and impartial face-to-face guidance on the financial choices available, in order to give added support to members.
This added flexibility does however only apply to DC members; the Government has noted the risk that public sector defined benefit (DB) members might attempt to take a transfer of benefits out of the DB scheme into a DC scheme, and intends to legislate ban transfers from DB public sector schemes to DC arrangements. As regards transfers from private sector DB schemes, the Government is to consult on different options such as the transfer being subject to trustee consent or imposing a restriction on the extent to which transferred funds can benefit from the changes that come into force in April 2015 or even an outright ban on these too. It should be noted that the Government’s concern here does not seem to be protecting DB members from being enticed to make bad retirement decisions, but that a rush of transfers from DB to DC could have a detrimental economic effect: transfer values out of the unfunded (apart from the LGPS) public sector schemes would have to be met from the public purse whilst private sector schemes would have to sell assets which could affect the financial markets.
Minimum pension age
To coincide with the time when the State Pension Age increases to 67, the consultation proposes to increase the minimum age that members will be able to access their funds from 55 to 57 from 2028. Thereafter, the minimum pension age and State Pension Age will be 10 years apart.