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Freedom and choice in pensions: government response to the consultation

On Monday 21st July 2014, HM Treasury published the government’s response to the consultation that followed the Budget proposals for radical pensions changes.

The outcome of that consultation is as follows:

  • The Budget proposals are to go ahead, from April 2015, for “defined contribution” schemes
  • Schemes will be able to offer the flexibility if they want to, without the need to update their rules first (by virtue of a “permissory statutory override”)
  • Individuals will be able to transfer to another scheme, right up until the point of retirement, if their current scheme does not offer the new flexible options (normally rights to transfer from certain schemes only apply up until a year before the normal retirement age)
  • Tax rules will be updated to allow new innovations – including the ability to have a decreasing annuity or to take a lump sum from an annuity (this could reinvigorate the annuity market)
  • Loopholes created by the new regime will be closed by new tax legislation – this could result in some complex detailed rules, in order to ensure that the tax system operates as intended (this was always going to be necessary in order to protect the tax system)
  • Those who choose to drawdown more than the lump sum will still be allowed to make new pension savings, up to £10,000 per year
  • The minimum age at which pension savings can be withdrawn will increase from 55 to 57 in 2028
  • The 55% tax charge that applies to death benefits after age 75, or for crystallised funds, will be reduced. How this will work, and the new rates of tax, will be announced in the Autumn Statement

Because of the new options, the Guidance Guarantee was confirmed as follows:

  • Every individual with Defined Contribution savings will be able to access free and impartial guidance, at the point of retirement, either face to face or by telephone / online 
  • Delivery of the Guidance Guarantee will be the responsibility of independent bodies, including the Pensions Advisory Service (TPAS) and the Monday Advice Service (MAS).
  • The cost of these services will be paid for by an industry levy Pension providers will be required to signpost the availability of the Guidance Guarantee in the run up to retirement, and at the point of retirement
  • The Guidance Guarantee is to be in place by April 2015 – and various teams are working to achieve this, drawing on industry experience including from TPAS and MAS

Defined Benefits Schemes

The new rules only apply to Defined Contribution schemes (including Cash Balance schemes), but not Defined Benefits Schemes

There had been proposals to ban transfers from Defined Benefits to Defined Contribution schemes, but the government has decided to allow these transfers (although comment was rightly made, that these types of transfers often result in poor customer outcomes) It will NOT be possible to transfer from an unfunded statutory schemes (but funded ones will be okay)

The full response can be obtained from HM Treasury’s website: https://www.gov.uk/government/consultations/freedom-and-choice-in-pensions

 

 

July 22nd, 2014