Last week we published a post summarising some of the pension implications following George Osborne budget announcements. This week part 2 covers caps on drawndown pensions and the limits on small pension pots.
Capped and flexible drawdown
Members of DC funds have the option of setting up ‘capped drawdown’ arrangements as an alternative to buying an annuity. There is a cap on the amount of income that can be drawn down in any one year. Commencing 27 March 2014, the government proposes to increase this to from 120% to 150% of an equivalent annuity (subject to pension scheme rules).
Currently, once an individual satisfies certain criteria, the limit on the amount that they can draw down is lifted, entitling them to ‘flexible drawdown’. From 27 March 2014, to further increase the flexibility of these drawdowns, the condition dictating the annual income earned by the member before flexible drawdown can apply will be reduced from £20,000 per year to just £12,000.
Administrators of schemes will, from 27 March 2014, have to make sure systems are updated to take into account these changes.
Limits on small pension pots
On reaching the age of 60, members with pensions worth less that £2,000 can, at the moment and with some restrictions, give up their pension in exchange for a cash lump sum. This is heavily endorsed by scheme trustees and employers. The reason for this being that these small pensions create a disproportionate administrative burden to the scheme and the trustee. The limit is to be raised to £10,000 from 27 March 2014. As the vast majority of UK private sector schemes contain members that fit into this group, it is likely that lots of individuals will want to take up this ‘win-win’ opportunity.
Although much of the detail in these proposals is yet to work through, these changes are likely to pose questions to the business models and management of insurance businesses, and (perhaps more importantly for some) pose serious questions to individuals coming up to retirement. These people might choose to consider delaying any planned annuity purchase and reconsider their options when the new system commences in April 2015.
Whilst the proposed changes have been welcomed by many – and most would agree that a move away from annuities being the only viable option of the majority of DC members is a good thing – the extent of the proposals has surprised the pensions industry, including it seems bodies such as the Pensions Regulator and the National Association of Pension Funds. There also seems to be material inconsistency with other recent policy from the introduction of auto-enrolment to the crackdown on pension liberation.
Overall the proposals do not seem to have been fully thought through and lead to more questions than answers. Are we really happy to let people spend their entire retirement savings in their fifties? David Cameron has already admitted that people taking their pension fund as cash may have to use it to pay for their old age care, and we suspect this will not be the last unpublicised knock-on effect to materialise.
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