Describing them as the “most far reaching reforms” to pensions since 1921, the Chancellor of the Exchequer announced measures in the Budget 2014 that from 6 April 2015 will allow UK defined contribution (DC) pension scheme members to take their entire DC pots from age 55 as a cash lump sum – 25% will be tax free, the rest taxed at the marginal income tax rate.
Currently, a lump sum over 25% of the value of an individual’s DC pot attracts tax at 55%. A new “income drawdown” regime will also be introduced under which members can drawdown as much as they like of their DC pension pot, when they like, from age 55. The 55% tax charge that currently applies on payment of most lump sum death benefits will be abolished in favour of a more favourable tax regime (for the member).
Actions for employers and trustees
DC schemes can decide whether or not to make any of these new “flexibilities” available to members. A statutory power exists allowing scheme trustees to pay the new benefits, notwithstanding any provisions of the rules of the scheme and without having to obtain the employer’s consent. In practice, however, any flexibility offering will need to be blessed by the employer as the employer may have to bear some of the administration cost.
The government is offering free guidance to individuals at retirement to ensure they make the right retirement choices in light of the new flexibility. Schemes will be required to sign-post the availability of the guidance to members.
DB schemes can also offer these flexibility measures to their members, for instance by allowing members to convert their DB pensions to a DC benefit internally, or to make available another DC arrangement to which members can transfer their DB benefits and then take them flexibly.
Employers and trustees will need to consider how best to communicate the changes to members and to ensure that their administration systems can accommodate them.