The pensions industry is gearing up for yet more radical changes to its landscape from 6 April, which is when the remainder of the widely-reported pension flexibility reforms come into force.
The reforms principally apply to pension schemes offering "defined contribution" (DC) benefits. They will, according to HM Treasury, give members greater freedom and choice in the manner in which they can access their benefits.
Until now, the conventional option for taking DC pension benefits has been to buy an annuity. From 6 April, the main options that members can have for taking their DC pension benefits (and categorised as "Flexible Benefits" within the legislation) are as follows:
- A full withdrawal of the fund benefits (in one go as cash), taking up to 25% of the pot as a tax-free lump sum and having the rest taxed at the member's applicable income tax rate;
- A withdrawal of part of the member's fund to begin with, with 25% of that withdrawal being tax-free and the rest chargeable to income tax, and any subsequent withdrawals from the remainder of the"uncrystallised" fund being 25% tax-free as well; and
- Flexi-access drawdown, which replaces the existing flexible drawdown regime and allows members to either:
- take their full tax-free cash sum right away and use the remaining fund as a drawdown pension income pot; or
- take part of their tax-free cash right away while allocating some of the remaining fund as a drawdown pension income pot and treating the rest of the fund as 'uncrystallised' until a later date.
The availability of these options within an existing arrangement will depend on whether the scheme in question offers it. Members may even be able to make use of a mix of the above options.
In addition, since March 2014, members can withdraw the full amount from any occupational, personal or stakeholder pension fund as cash where its value isn't more than the "small lump sum" threshold of £10,000 (up from £2,000). Taking benefits in that way can be done up to three times in a member's lifetime.
On a related note, the "trivial commutation" regime also changed. It is possible for members of defined benefit (DB) schemes to withdraw, as cash, the full value of their DB pension entitlement (also categorised as their"Safeguarded Benefits") from all schemes of which they are a member (as long as that value does not exceed the new increased limit of £30,000). If a member's benefits exceed that limit and if he wants to take all of his benefits in cash, he would need to transfer his Safeguarded Benefits to a Flexible Benefit arrangement.
Two of the key challenges facing pension scheme trustees and employers are deciding how to communicate the changes to members and ensuring that the protection members will have surrounding the new choices is in place. Members should be given the appropriate information at the right time and The Pensions Regulator and the Financial Conduct Authority (FCA) have thrown their hats into the ring by separately releasing draft guidance on the subject.
The Pensions Regulator's draft guide to the April reforms
As the name suggests, the Regulator's Draft Essential Guide to Communicating With Members provides some tips on key statements and information to provide members about their choices under the new freedoms. With the Occupational and Personal Pension Schemes (Disclosure of Information) (Amendment) Regulations 2015 having been passed this week, this guide will come into force.
Along with the guidance is a set of five generic risk warning statements which trustees and advisers may find useful, covering the various options for taking benefits and the danger of pensions-related scams.
The guide and the legislation state that members must be informed of how to access the Government's new pensions support service, known as Pension Wise. The Pension Wise website has now been launched, and can be viewed by clicking here.
Publications regarding transfers from DB schemes
The Regulator has also been consulting on transfers from DB schemes to DC arrangements, as has as the FCA. The Regulator has outlined new safeguards that will apply from 6 April.
In a nutshell, individuals who wish to transfer their Safeguarded Benefits (if their value is more than £30,000) into a DC arrangement will be required to obtain "appropriate independent advice" from an FCA authorised adviser. The trustees of the DB scheme in question will have to check that that advice has been given, although it will not be the trustees' responsibility to check the appropriateness of the advice or whether the member is following it.
The FCA paper will be of interest to IFAs, providers, benefit consultancies and sponsoring employers of DB schemes, many of whom will already have begun to receive queries from members who are curious about the new pension flexibilities and, perhaps, wish to determine whether they can benefit from them. The FCA consultation is accessible here – it ends on 15 April, interestingly after the flexibility changes take effect.
With the rush to complete the guidance and the associated regulations before 6 April, the only saving grace is that 6 April is also Easter Monday and we should still be enjoying our Easter eggs!