The ability of members of DC schemes to take their entire 'pot' as cash from April 2015 onwards has opened up a huge range of possibilities. (And an equally large number of behavioural 'unknowns', that are already the subject of fierce debate within the industry.) But less-well documented is the legal peregrination on which George Osborne's announcement will take us. This article looks at the issues it gives rise to, and considers how the dice may fall.
How does the Budget become law?
A number of changes to pensions law have already been made as a consequence of the 2014 Budget. Although they have not yet made it onto the statute book, they do have immediate legal force due to the Provisional Collection of Taxes Act in the same way as if they were contained in an Act of Parliament.
These "Budget Resolutions" will only cease to have effect in one of three very limited circumstances:
- if the Finance Bill by which they will be enacted does not have its second parliamentary reading within 30 days of the Budget;
- if Parliament is dissolved or prorogued (discontinued); or
- if seven months elapses from the date on which the Resolutions were passed.
Trustees can, therefore, properly administer their schemes on the basis of the new "minor flexibilities" introduced by this year's Budget, with no material risk of doing so unlawfully (i.e. of being found, at some time in the future, to have been making unauthorised payments to members).
"Minor flexibilities" already in place
The following changes to the law have also been promised by Government with effect from April 2015. By contrast with the "minor flexibilities" considered above, these will require explicit changes to legislation in order to have legal effect.
The following changes to the law already have effect as a consequence of the Budget.
- The maximum amount of pension savings (across all of a member's "arrangements") that may be the subject of trivial commutation is increased from £18,000 to £30,000.
(Note however that it is only this limit which has been increased: most notably, the upper limit for "death benefit lump sums" and "winding-up lump sums" remains at £18,000).
- The general limit on commutation of "small pots" is increased from £2,000 to £10,000.
(The number of small pots that can be commuted in this way is also increased, from two to three.)
- The "minimum income" threshold that must be met in order for flexible drawdown to take place is reduced from £20,000 per annum to £12,000.
(The maximum drawdown pension that can be taken from a capped drawdown fund is also increased, from 120% to 150%.)
It hopefully goes without saying that a scheme's rules also need to permit such payments in order for them to be "authorised" for tax purposes; scheme rules in many cases simply refer to (and allow) what is permitted by legislation, so in those cases this will not be a problem in practice. The specific rules of each scheme should be checked.
Further changes to combat pensions liberation
Aside from the most fundamental change (surely one of the best ways of combatting 'liberation fraud' is to permit schemes to pay a member's entire benefits as cash?), the following additional measures are being implemented:
- As from 20 March 2014, the day following the Budget, the main purpose of a registered pension scheme must be to make authorised payments. HMRC is also given new powers to de-register suspected liberation vehicles, and not to register new ones. In addition it has a new range of investigative powers (including the right to enter and search premises) to assist with any decision whether to register or de-register schemes.
- And as from 1 September 2014, scheme administrators must pass a "fit and proper persons" test. HMRC's new search powers will also be capable of being used to determine if this test is met, and similarly schemes can be de-registered (or not registered) if the test is not met.
"Major flexibilities" in force by April 2015
The most well-vaunted change is the ability of members of DC schemes to take their entire pension fund as a cash lump sum, subject to deduction of tax at the member's marginal rate, subject to the necessary legislation being passed. This would apply from age 55, which for some individuals may be earlier than they are currently entitled to their benefits.
Hot on its heels is the possible ban or restriction on DB-to-DC transfers.
But to what extent will a member's ability to take their entire fund as cash be subject to a scheme's rules? When will any such ban, however wide or narrow it may be, come into effect? And in the meantime what (if anything) should trustees be saying to their members about all this, particularly if they are at a critical stage in concluding a buy-in contract or even winding-up a scheme?
A lesser-known change, which is due to be implemented via this year's Finance Bill, is the widening of the "window" within which members may take "pension commencement lump sums" from schemes. Presently they are required to do so no more than six months before, and one year after, they become entitled to the pension to which the lump sum relates.
The proposal is to widen the 6-month element of the window to 18 months. This would have the effect of giving members who have already taken their PCLS the flexibility to delay drawing their pension until after April 2015, when it is expected be possible to take it as cash rather than by means of annuity purchase.
This makes eminent sense. More perplexing is how the Government will ensure that all members of DC schemes have access to free, impartial, good quality face-to-face advice. Scheme providers (insurance companies and trustees) will be obliged to ensure such advice is delivered from April 2015 onwards. The Financial Conduct Authority will be obliged to ensure that the advice is sufficiently "robust".
The Government has committed £20m to get this initiative up-and-running, but who will meet the cost once these monies have been exhausted is not clear. Maybe it will be an ultimate hit on members' pots. Whether they will be content, as a consequence, with 'merely' a Ferrari or an Aston Martin remains to be seen.
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