In March this year, the Government announced far-reaching proposals to introduce greater flexibility in the pensions landscape. The principal proposal was that members with defined contribution (“DC”) pots should be able to take the whole of those pots as a cash lump sum from April 2015 rather than have to purchase an annuity or enter income drawdown arrangements. Such a lump sum would be taxed at the member’s marginal rate of income tax, subject to the current right to take 25% of any entitlement as a tax-free lump sum.
The Government has now provided more details on how these proposals will work.
Scheme rules
Schemes will not be forced to amend their rules to allow members to make use of the new flexibility. The Government plans to introduce a “permissive statutory override” which will allow schemes to pay out cash sums or to provide a drawdown facility if they want to, irrespective of the provisions of their rules, but will not compel them to do so.
To ensure that all DC members are able to make use of the new flexibilities, the Government is also planning to extend their statutory right to a transfer up to the scheme’s normal retirement age (as opposed to one year before retirement currently). The statutory right to a transfer payment is likely to override anything in the scheme rules and this change would not therefore require an amendment to existing scheme rules.
Tax rules
The Government does not want the new flexibilities to be used to achieve unintended tax advantages, for example by individuals over age 55 diverting salary into a pension scheme and then immediately taking 25% of the payment tax free from the scheme. Therefore, where individuals access above a certain amount of their pension savings as cash, they will only be able to continue to make tax relieved pension contributions of up to £10,000 a year.
Minimum pension age will rise from age 55 to 57 in 2028 and thereafter will remain 10 years below state pension age. Contrary to the original proposals, this change will not apply to all public sector schemes.
Guidance guarantee
There will be an obligation on trustees to signpost DC members approaching retirement to independent third party guidance. The providers of the guidance will be monitored by, and the content must comply with, standards set by the Financial Conduct Authority (“FCA”).
It appears that the guidance will be funded by a levy on regulated financial services firms rather than occupational pension schemes or employers having to meet the cost.
Transfers from defined benefit schemes
The Government had consulted on the possibility of preventing the transfer of benefits from defined benefit to defined contribution schemes to prevent large scale transfers immediately after the new flexibilities come into force resulting in an adverse impact on the stability and funding of defined benefit schemes. The Government has decided not to proceed with such a ban and will continue to permit such transfers (subject to conditions). There will however be additional guidance for trustees on when it is possible to delay making a transfer payment because of any adverse impact on the scheme.
There will be a requirement for individuals with benefits in excess of £30,000 to take financial advice before making a defined benefit to defined contribution transfer. Transferring trustees will need to ensure that this requirement has been complied with before making a transfer. Generally, the cost of such advice will need to be met by the member but where a transfer is being made as part of an employer-led incentive exercise, it will be met by the employer.
Similar provisions will apply to transfers from funded public sector schemes.
Members of defined benefit schemes will also be provided with additional flexibility as the ages at which small lump sums and trivial commutation can be taken will fall from 60 to 55, ensuring greater consistency with other benefits.
Next steps
Draft legislation will be introduced to take forward some of these proposals in autumn 2014. The current Pension Schemes Bill will be amended to include provisions on the guidance guarantee and the FCA will issue a policy statement in September 2014.
A full copy of the response to the consultation is available here: http://tinyurl.com/pensionsresponse
