14th August 2015
Government confirms its plans for pensions flexibility
We previously looked here at the pensions flexibility announced in the Budget. Some changes took effect from 27 March 2014, others were due to take effect in April 2015, subject to consultation.
Consultation is now complete and the Government has made its decisions on the April 2015 changes and how these will be delivered, details of which are set out below:
Allowing members to take advantage of flexibility
- A permissive statutory override will be introduced to allow money purchase schemes to choose to follow the new tax rules instead of their own rules. This will help to ensure that members can withdraw up to the whole of their money purchase pot in one go (with 25% tax free and the remainder subject to the member’s marginal tax rate).
- Members will be able to transfer between money purchase schemes up to the point of retirement (instead of up to one year before the scheme’s normal retirement age).
- Measures to stop people over age 55 avoiding tax on their current earnings by diverting their salary into their pension with tax relief, and then immediately withdrawing 25% tax-free are included in draft legislation. Broadly, members with a money purchase pot of £10,000 or over who want to draw down more than 25% tax free will have their future pensions savings limited by an annual allowance of £10,000.
- The minimum age at which people can access their pension savings will rise from 55 to 57 in 2028. Thereafter, it will remain ten years below state pension age.
- Restrictions on lifetime annuities will be removed so that payments from them can reduce (e.g. at state pension age) and continue after the member’s death for any period specified in the annuity contract (instead of a maximum of ten years). It will also be possible for lump sums specified at the point of purchase to be paid and for payments due to beneficiaries which are under £30,000 to be taken as a lump sum.
- Changes to the 55% tax charge that applies to lump sum death benefits paid from uncrystallised or undrawn funds in respect of a member who dies after age 75 will be announced in autumn.
Members with money purchase pots will receive free and impartial guidance on the options available to them at retirement.
Members will be signposted to the guidance by their scheme or pension provider at between four and six months from their intended retirement date. They will be able to access the guidance in different ways including face-to-face, online and by telephone.
The guidance will be delivered by independent organisations, including the Pensions Advisory Service and the Money Advice Service. It will be paid for by a levy on regulated financial service firms.
The standards for the guidance will be set and maintained by the Financial Conduct Authority. It is consulting on them here. The guidance will not recommend particular products or providers but will be tailored to members’ personal circumstances.
Defined benefit schemes
- Members will still be able to transfer from a defined benefit scheme to a money purchase scheme but will be required to take independent financial advice first. This requirement will not apply to members whose pension savings are below £30,000. The advice will be paid for by the member unless the transfer is within the same scheme or part of an employer-led incentivised transfer exercise (in which case the employer will pay).
- Transfers from unfunded public sector pension schemes will not be allowed.
- The age at which defined benefit scheme members can take £30,000 of total pension savings as a lump sum, or a £10,000 small pot as a lump sum regardless of total pension savings will be lowered from 60 to 55.
Over the coming months, schemes will need to review their rules and decide the extent to which they will enable members to access these new flexibilities For further information, please contact Christopher Nuttall on 01604 461134 or click here to email Christopher. For more information on our Pensions services please click here.