The Government has responded to its consultation on the planned reforms to the rules for accessing DC pension savings, which were announced in the Budget earlier this year. In its response, the Government has revealed that the ‘Guidance Guarantee’ will be provided by independent organisations, including The Pensions Advisory Service (TPAS) and the Money Advice Service (MAS), and it will be paid for by a levy on regulated financial services firms. Transfers from defined benefit (DB) to defined contribution (DC) schemes, including funded public sector DB schemes, will also continue to be allowed.
Government’s response – A summary
In his Budget statement in March, the Chancellor announced radical changes which will give individuals with DC retirement savings complete flexibility over how they access their savings. Following the Budget, the Government began a consultation process on various aspects of the proposed new regime, including the guidance that would be provided to individuals as they approach retirement and whether DB to DC transfers should continue to be allowed.
In its response to the consultation, the Government has confirmed that:
- the Guidance Guarantee will be provided by independent organisations, including TPAS and MAS, and paid for by a levy on regulated financial services firms (see below)
- transfers from private sector DB schemes and funded public sector DB schemes to DC schemes will continue to be allowed (excluding pensions in payment) subject to two safeguards (see below)
- a permissive statutory override will be introduced to ensure that all DC schemes are able to offer their members the increased flexibility
- individuals will be able to transfer between DC schemes, up to the point of retirement, if their scheme does not offer flexible access
- it will make a number of changes to the tax rules to allow providers greater freedom to create new and innovative products which more closely meet consumers’ needs, including allowing annuities to decrease and allowing lump sums to be taken from annuities
- new tax rules will be put in place to ensure that individuals do not abuse the new flexibilities by diverting their salary into their pension with tax relief and then immediately withdrawing 25% tax-free or by recycling benefits to obtain a higher tax free lump sum
- it will increase the minimum age at which people can access their private pension under the new tax rules from 55 to 57 in 2028 (this change will apply to all pension schemes aside from those in the public sector under which normal pension age will not be linked to state pension age from 2015, namely those for firefighters, police and armed forces); and
- it will announce changes to the tax charge applied to pension savings in a drawdown account at death (currently 55%) in the Autumn Statement.
Click here to read our speedbrief on the Budget announcements. The Guidance Guarantee
To help individuals make “confident and informed” decisions about how to use their retirement savings, every individual with DC savings will have a new right to free and impartial guidance as they approach retirement, from April 2015. This guidance will be tailored to individuals’ personal circumstances, but will not recommend specific products or providers. It will be provided by independent organisations, including TPAS and MAS, that have no actual, or potential, conflict of interest, to ensure that the guidance is completely impartial.
The Government will legislate to give the Financial Conduct Authority (FCA) responsibility for setting standards for the delivery of this guidance and monitoring compliance with those standards. The FCA published a consultation paper on its proposed standards yesterday, alongside the Government’s response.
Pension providers and schemes will be under a duty to ensure that they make individuals aware of their right to impartial guidance and signpost them to the guidance service within four to six months of the individual’s intended retirement date. Individuals will be able to access and use the guidance service in a range of ways, including online and by telephone with the option of a face-to-face meeting for anyone who wants it. Further work is being done on how the guidance will work for individuals with multiple pension pots.
The cost of delivering this guidance will be met by a levy on regulated financial services firms who stand to benefit from the increased need for financial advice which is likely to result from the planned pensions reforms.
A significant amount of work needs to be done to ensure that the guidance service is in place for April 2015. A team has been established within the Treasury to lead this work and it is bringing together a range of delivery partners, including TPAS and MAS, to help achieve this.
DB to DC transfers
Transfers from private sector DB schemes to DC schemes (excluding pensions in payment) will continue to be allowed. However, the Government intends to:
- introduce a new requirement for an individual to take independent financial advice from an adviser who is independent of the DB scheme and authorised by the FCA, before a transfer can be accepted; and
- work with the Pensions Regulator to publish new guidance for trustees on the use of their existing powers to delay transfer payments and take account of scheme funding levels when deciding on transfer values.
Transfers from unfunded public service DB schemes will not be allowed. However, transfers from funded public sector DB schemes to DC schemes will be permitted and safeguards similar to those in the private sector will be introduced where appropriate. The Government is also planning to consult on removing the requirement for individuals to transfer first from a DB to a DC scheme in order to access their savings flexibly. Whatever the outcome of that consultation, the trivial commutation and small pot rules will continue to apply to DB schemes allowing individuals to take up to £30,000 of total pension savings as a lump sum, or a £10,000 small pot as a lump sum regardless of total pension wealth. The age at which an individual can make use of these rules will also be lowered from 60 to 55.
The Government has seen sense on the anti-avoidance tax rules for anyone accessing DC drawdown. The annual allowance for any such individual will reduce to £10,000 – a much better, simpler and more workable option than some of the alternatives that were being considered.
The news that the Guidance Guarantee will be delivered by independent organisations and paid for by a levy on regulated financial services firms will come as a relief to employers, pension providers and trustees of DC schemes. However, trustees and pension providers still have to decide to what extent they will enable their members to take advantage of the new flexibilities under their scheme and update their scheme’s rules accordingly. They will also need to update member communications before April 2015 to ensure that they reflect the new options and highlight the new guidance service that will be available to individuals.
We are pleased to see no ban on DB to DC transfers, and sensible anti-avoidance tax rules for those accessing flexible drawdown – both things which we had been lobbying for strongly through our work with industry bodies, including the CBI and the NAPF.
Alongside its consultation response the Government also published “Pension reforms: eight things you should know”. Readers who read our speedbrief on the IBM case earlier this year may form the view - as we have done - that no.2 looks like it may create a “reasonable expectation” of 25% tax free lump sums continuing and that present and future Governments may breach this reasonable expectation if they resile from this!