We sent you recently brief information about the Government’s changes in the Budget 2014 and, subsequently, a note on potential issues for scheme rules. Since then, more detail about the new pension flexibilities has emerged. The Government’s response to the consultation on “Freedom and choice in pensions” was published on 21 July 2014 and allays some of the concerns regarding risks to the economy of transfers from defined benefit schemes, and fears that savers would impoverish themselves by withdrawing all their pension funds at once.
Hot on the heels of the consultation response, HMRC has published for consultation the draft Taxation of Pensions Bill, which will make the changes needed to legislation to implement the Budget flexibilities. In brief, these will allow individuals aged 55 and above to access their pension savings in money purchase arrangements as they please, subject to their marginal rate of income tax. The main provisions in the Bill are expected to come into force on 6 April 2015.
Now is the time for trustees and employers to start making decisions about the future shape of their scheme benefits. Whether your scheme is defined benefit (DB), defined contribution (DC) or offers hybrid benefits, the Budget changes could have a significant impact on your scheme members and, for many of them, will result in a more flexible pension environment. The Pensions Regulator has advised trustees and administrators to consider, with their professional advisers, the implications of the changes for their scheme.
Below are some of the key points which we suggest trustees and employers should start to consider as early as possible:
Do your scheme rules allow for the new trivial commutation and “small pot” rules?
Do you have any members who received a pension commencement lump sum (PCLS) on or shortly before 27 March 2014? They may be affected by the temporary relaxation of the PCLS rules and be able to take advantage of the extended period to take an annuity, or even cancel an annuity contract. These changes are not overriding and scheme provisions would need to be checked to see whether any amendments are required.
A statutory override will allow (but not require) implementation of the new flexibilities by schemes offering DC benefits. Have you decided whether to amend your scheme rules, or to offer flexible benefits simply by adopting the new tax rules, or to provide access to the flexible regime solely by transfer out of your scheme?
Are you aware how the guaranteed guidance is to be delivered, how the costs are to be met and of any responsibilities trustees and employers have in relation to the provision of such guidance?
Members of all occupational (and some funded public) DB pension schemes are to be allowed to transfer out to DC schemes to take advantage of the new flexibilities. Have you considered how large numbers of transfers may affect your DB scheme’s funding position and its investment profile?
Are you aware of the requirements for member guidance relating to transfers from DB schemes?
Are you aware of the proposed new guidance on transfer payments for trustees of DB schemes?
Will your DB scheme allow direct withdrawal of benefits in lump sum form if this is implemented in future?
Have you considered how the proposed changes could affect your workforce?
If you offer a contract-based scheme to your employees, have you checked with the provider what will be offered once the new flexibilities are implemented in April 2015?
The implementation date for the remainder of the Budget flexibilities is only a few months away – 6 April 2015. However you decide to implement the new flexible regime, this must be communicated accurately and clearly to members. Are your member communications now under review?