2015 will see significant changes in relation to defined contribution (DC) pensions. Some of the key issues that employers, trustees and pension providers will need to consider in respect of the changes are highlighted below.
New pension freedoms
In March 2014, the Chancellor announced radical changes to the tax rules that apply when accessing pension savings from a DC pension plan. From the start of the 2015-16 tax year, savers will essentially be able to choose what they want to do with their DC savings from age 55, and will not be forced to buy an annuity.
From 6 April 2015, individuals with pension savings in a DC arrangement will be permitted to:
- take their pension savings as cash in one go or in instalments. The first 25% of each payment will be tax free, with the remainder being taxed at the individual’s marginal tax rate;
- purchase a lifetime annuity and take 25% of the amount accessed as tax free cash;
- allocate funds to a flexible drawdown account (referred to as ‘flexi-access drawdown’) under which they will be able to keep their funds invested and draw them down as and when they want to. 25% of the amount allocated can be taken as tax free cash;
- receive a scheme pension and take 25% of the amount accessed as tax free cash; or
- select a combination of the above.
If an individual wants to select one of the options outlined above and their scheme does not offer it, they will have the right to transfer their savings into an arrangement that does. There will also be a new statutory power which will enable trustees and pension providers to allow members access to the new pension freedoms, even if the plan rules would otherwise prevent this.
Members of defined benefit (DB) plans will also be able to take advantage of the new pension freedoms by transferring to a DC plan. However, except where the capital value of their DB benefits is below £30,000, the trustees of the DB plan must check that the member has received independent financial advice from a FCA-authorised adviser before making the transfer. The new flexibilities will apply directly to money purchase additional voluntary contributions (AVCs) in a DB plan.
All DC savers will have access to free guidance to help them understand their options, and trustees and pension providers will need to inform members about this as they approach retirement.
- Trustees and providers need to understand the new tax rules and new benefit options and decide which of the options, if any, to offer members under their scheme.
- Member communications will need to be updated to make members aware of their new options and to signpost members to the new guidance service.
Procedures for authorising transfers from DB plans should be updated to ensure the new legal requirement for receiving appropriate financial advice is met.
Abolition of short service refunds
Currently, a member of an occupational pension scheme who leaves the scheme having completed between three months’ and two years’ qualifying service can be paid a refund of their contributions. From October 2015, refunds may only be paid from DC occupational schemes where members leave the scheme within the first 30 days of membership.
DC plan rules, member communications and administration procedures should be reviewed to see whether amendments are needed to reflect this change.
The government has introduced a range of measures to improve the quality of workplace DC plans, including:
- Independent Governance Committees: from April 2015, contract-based plans are required to establish an Independent Governance Committee with a duty to act in members’ interests;
- Charge cap: from April 2015, a charge cap of 0.75% on funds under management in default funds of DC “qualifying schemes” (i.e. those used by employers to satisfy auto-enrolment obligations) will apply. Adviser commissions and active member discounts will also need to be eliminated from qualifying schemes from April 2016; and
- Chair’s statement: DC occupational schemes will be required to have a chair of trustees. The chair will be obliged to issue a regular statement reporting on reviews of investment strategy and assessments of the value of costs and charges.
- Contract-based schemes need to establish an Independent Governance Committee from April 2015.
- Employers need to consider how the charge cap and other planned changes may affect their arrangements in relation to any auto-enrolment qualifying scheme.
- If they do not already have one, DC occupational schemes should start identifying candidates for chair of trustees.