Summary and implications
The Government has issued its response to the consultation on the Budget proposals to introduce pension flexibility for DC pension savings from April 2015. Individuals age 55 or over with DC pension savings will be able to access their benefits as they wish, subject to the payment of income tax. The detail announced this week includes:
- overriding legislation enabling schemes to make flexible payments if they wish;
- transfers will continue to be allowed from DB schemes to DC schemes subject to the individual taking independent financial advice;
- all DC scheme members approaching retirement will be offered free guidance on using their pensions savings, to be delivered by independent bodies designated by HM Treasury, monitored by the Financial Conduct Authority (FCA) and paid for by a levy on regulated financial services firms;
- anti-abuse measures will be put in place to restrict tax relief on new pension savings for those choosing to withdraw more than their tax-free lump sum; and
- normal minimum pension age will rise from 55 to 57 in 2028 and thereafter track at 10 years below state retirement age.
In this briefing we consider in more detail the key aspects of the proposed new regime.
References to DC schemes include schemes providing money purchase and cash balance benefits.
Statutory override: enabling schemes to pay flexible benefits
The Government had considered requiring DC schemes to allow members to access their benefits flexibly. This could have meant schemes having to offer drawdown facilities to members who did not wish to take all their benefits in one go. It has been accepted that this could be difficult and expensive for many schemes.
Instead of requiring schemes to allow members to draw benefits flexibly, a permissive statutory override will allow schemes to ignore their rules and follow the tax rules instead if they wish. This will leave it open to schemes to allow members to draw all their benefits in cash or to operate a drawdown facility, but they will not be required to do so. Draft legislation is to be issued for a technical consultation in August, with the main provisions to be included in the Pensions Tax Bill in the autumn.
In order to allow members of DC schemes which decide not to introduce the new flexibility to benefit from the regime, the legislation governing transfer payments will be amended to allow transfers between DC schemes at any point up to the scheme's normal retirement age (NRA). Currently the statutory right to transfer ceases 12 months before normal pension age (NPA) (NPA is defined in statute and is often, but not always, the same as NRA).
DB schemes: transfers allowed but only on advice
Members of DB private sector schemes will retain their current transfer rights (broadly there is a statutory right to transfer up to 12 months before NPA and there are restrictions on the transfer of pensions in payment) but they will have to take advice from an authorised financial adviser who is independent of the scheme before a transfer payment can be made. The Government is not expecting a flood of transfers in April 2015 and believes the overall impact of allowing transfers to continue is likely to have limited impact on the existing DB asset base.
No detail has yet been provided as to exactly how this requirement will fit in with the existing cash equivalent transfer legislation. The trustees of the DB scheme will be required to check that the member has taken appropriate advice before allowing the transfer to be paid but there is no detail on the timing of this, or whether the payment can still be made if the advice is negative. We would hope that there will be something in the legislation providing that the statutory right to a transfer payment does not arise until the member has provided the trustee with adequate proof of advice.
The Pensions Regulator will be producing new guidance for trustees on their powers and obligations relating to transfer payments. This will cover their powers to ask for time extensions for making payments and the circumstances in which reduced payments can be made to reflect the scheme's funding position.
Similar rules will apply to funded public sector schemes (including the LGPS) but there will be a ban on transfers to DC schemes (with certain limited exceptions) from unfunded public sector schemes, such as the PCSPS.
The requirement to take advice will not apply to transfer payments where the member has pension savings below the trivial commutation level (£30,000).
The guidance guarantee: free and impartial advice on pension options
Trustees of DC schemes and contract-based providers will have to send information to all members between four and six months before their intended retirement date (or on request). In an occupational scheme the intended retirement date would be the NRA unless the trustees had been notified otherwise by the member.
Each member will be entitled to individual impartial guidance (face-to-face if they wish). The guidance is not intended as advice, but should equip individuals to make informed choices about how they use their pensions savings. HM Treasury is responsible for designing and implementing the guidance service and initially will be working with the Pensions Advisory Service (TPAS) and the Money Advice Service (MAS) but other independent providers will almost certainly come on board.
Those offering guidance will not have to be formally authorised by the FCA but will be designated as official providers of guidance by HM Treasury and will be subject to a standards regime to be operated by the FCA. The FCA has issued consultation on the proposed standards regime.
The guidance will be paid for by a levy on regulated financial services firms to be collected by the FCA. These are the firms most likely to benefit from well informed consumers and so the Government thinks they should help fund the delivery of the service.
Anti-abuse: £10,000 annual allowance for those drawing over their tax free limit
There is a concern that individuals over age 55 might divert their salary into a DC pension scheme (benefiting from tax relief) and then immediately withdraw 25 per cent of that amount tax free.
Currently individuals operating flexible drawdown lose any right to tax relief on future pension contributions. The Government considers it would be disproportionate to extend that to all individuals who access their pension savings flexibly from April 2015. Instead the following rules will apply:
- those currently in flexible drawdown will have an annual allowance of £10,000 from April 2015;
- those who draw down more than their tax-free lump sum from April 2015 will also have an annual allowance of £10,000 for future pension saving;
- withdrawals of an occupational pension pot of less than £10,000 will not trigger the provisions and the usual annual allowance (currently £40,000) will continue to apply; and
- those currently in capped drawdown will not be subject to the £10,000 annual allowance unless and until (from April 2015) they withdraw more than the capped amount.
More details of the anti-abuse provisions will be included in the Pensions Tax Bill in the autumn.
Increase in normal minimum pension age and other stories
Despite indications to the contrary in the Queen's Speech, the Government intends to go ahead and increase the normal minimum pension age from 55 to 57 in 2028. Thereafter it will continue to rise in line with state retirement age (but 10 years below it). This will not apply to the firefighters, police or armed forces pension schemes.
Other areas where we can expect change include:
- provisions in the Pensions Tax Bill to enable providers to develop new products to provide retirement income including more flexible annuities;
- trivial commutation and small pot release to be allowed from age 55;
- the 55 per cent tax rate on death on funds held in a drawdown product or funds uncrystallised after age 75 is to be reviewed and proposals will be announced in the Autumn Statement; and
- a review of the means-testing requirements for welfare and social care benefits.
We now await further details in the Pension Schemes Bill (for the guidance guarantee) and the Pensions Tax Bill, later this year.
The Government's response to the consultation "Freedom and choice in pensions" can be found here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.