The biggest surprises in the Chancellor's budget statement on 19 March 2014 related to pensions. Mr Osborne announced that, following primary legislation to be put in place over the next year, from April 2015 the tax rules relating to defined contribution pension decumulation would be relaxed so that the whole pension pot can be taken at any time from retirement, subject only to tax at the individual's marginal rate (apart from the pension commencement lump sum, which remains tax free).
The details of the proposal will of course be in the legislation, but two issues arise of which trustees and employers should be aware and are discussed below.
Will schemes want to allow the pension to be taken as a lump sum?
It seems probable that the proposed changes will be permissive rather than prescriptive (although the government is consulting on precisely this point), so it will be up to schemes to decide whether members can take the pension in this way rather than being required to allow this. In many cases, the change will be likely to require a deed of amendment, and so necessitate, in principle, agreement by both the employer and the trustees.
The trustees and the employer may both have concerns with this approach and indeed there may be arguments as to whether trustees' fiduciary obligations and employers' duties of good faith are consistent with allowing a member to take the whole pension pot as a total commutation. These arguments have been rehearsed in recent times in relation to the issues around transfer requests to pension liberation schemes, and would apply to full commutations on retirement much as they would to such behaviour at an earlier stage.
Both trustees and employers will need to take advice to ensure that they are acting consistently with their duties and their scheme's provisions. A change of this nature will be significant for any defined contribution pension arrangement and the approach must be considered very carefully.
The provision of independent advice on decumulation
The Chancellor has responded to concerns about the financial choices made by members on retirement by requiring that free independent financial advice is provided to them. The proposal, as set out in HM Treasury's consultation "Freedom and choice in pensions", issued as the budget speech was given, states that personal pension providers and occupational money purchase pension schemes will be required to provide a "guidance guarantee" at the point of retirement, to provide this advice.
The details of this are awaited as the consultation progresses, and the Financial Conduct Authority is being asked to draw up some standards for the guidance guarantee, working with the Department for Work and Pensions and the Pensions Regulator. What is already clear is that the obligation and cost of ensuring compliance will rest, at least to some extent, with occupational pension schemes.
This change will require significant implementation by trustees, and may also require involvement from employers, as the concept is developed. The costs of operating the guidance guarantee may well be substantial.
As with many significant changes in pensions, the details are yet to be finalised and may have a noticeable impact on the proposals. However, the timescale for implementation is short, so that trustees, employers and others involved in the industry must be alert to the changes that will need implementing over the next year as the proposals develop.