On 21 July 2014, the Government announced its response to its consultation Freedom and choice in pensions. The paper outlined how proposals announced in the 2014 Budget, to allow individuals with a defined contribution (DC) pension to access their entire pension flexibly from age 55, could work in practice. Following extensive consultation, the Government has decided how it intends to proceed.
Accessing pension flexibility
- In deciding who pension flexibility should apply to, the Government has been guided by the principle that if individuals would previously have had to purchase an annuity or enter drawdown to access their pension savings, they should be able to access their pension under the new arrangements. So, those with a money purchase, cash balance or other arrangements which typically would have required the individual to purchase an annuity will be able to directly access their pension flexibly from April 2015. The Government adds that the proposals will also apply to individuals with Additional Voluntary Contributions (AVCs), subject to their pension scheme rules.
- A new override will be introduced to ensure that DC schemes are able to offer individuals flexible access to their savings, if they wish to do so. This will allow schemes to ignore their scheme rules and follow the tax rules instead, in order to make payments flexibly or to provide a drawdown facility.
- To ensure that individuals have access to flexibility where their existing scheme decides not to offer it, the cash equivalent transfer value requirements will be extended to allow individuals to transfer between DC schemes at any point up to their scheme’s normal retirement age.
Transfers from defined benefit schemes
- The Government will continue to allow transfers from private sector defined benefit (DB) to DC schemes, excluding pensions already in payment, subject to additional safeguards.
- There will be a statutory requirement to ensure that all individuals who are considering transferring out of DB schemes take advice, from a professional financial adviser who is independent from the DB scheme and authorised by the FCA, before transferring. As a result, DB schemes will be required to check that a member has taken such advice before allowing a transfer out of the scheme.
- In most cases the member will need to pay for the financial advice but “if the transfer is from DB to DC schemes within the same scheme” (we assume that this refers to one scheme with a DB and DC section), or as a result of an employer-led incentive exercise, it is the employer who will have to meet the cost.
- The Government will issue new guidance to trustees on how to use their existing powers to delay paying cash equivalent transfer values from the scheme if “the interests of the members or the scheme generally will be prejudiced by making the payments within the usual period” and on how to reduce transfer values to reflect the scheme’s current funding level. The Government will work with the Pensions Regulator, employers and trustees to develop the guidance.
- The Government intends to consult on whether the requirement to transfer first to a DC scheme should be removed for those DB members who wish to take advantage of the new flexibilities.
- Transfers from unfunded public service DB schemes will be prohibited, in order to protect the Exchequer and taxpayers. Transfers from funded public service DB schemes will be permitted, and safeguards similar to those in the private sector will be introduced where appropriate.
The guidance guarantee
- The guidance guarantee promised in the Budget will be provided by independent organisations, with no actual or potential conflict of interest, in order to ensure complete impartiality. Delivery partners will include the Pensions Advisory Service (TPAS) and the Money Advice Service (MAS).
- The FCA will coordinate the development of standards for the guidance service and a framework for monitoring compliance with these standards. The FCA is consulting separately on proposed high-level standards.
- Individuals will be able to access and use the service in a range of ways, including face-to-face, online and over the phone, according to their needs and preferences.
- The Government will legislate to require pension providers and schemes to signpost individuals to the guidance service as they approach retirement.
- A levy on regulated financial services firms will fund the cost of the guidance service.
- Changes will be made to the tax rules to allow providers to provide consumers with new retirement income products which suit their specific needs and circumstances, for example, to allow decreasing lifetime annuities and to allow lump sums to be taken from lifetime annuities.
- New tax rules will be put in place to ensure that individuals do not use the new flexibilities to avoid tax on their current earnings by diverting their salary into their pension with tax relief, and then immediately withdrawing 25% tax-free.
- The age at which individuals can access their private pension savings will rise under the tax rules from 55 to 57 in 2028 and will remain ten years below state pension age thereafter.
- The age at which an individual can commute benefits under the trivial commutation rules and the “small pot” rules will be lowered from 60 to 55.
- The Government states that the 55% tax charge on pension savings in a drawdown account at death will be too high when the new system is established in 2015 and intends to announce changes to this at the Autumn Statement.
A progress report has been promised in the autumn.