At Budget 2014, the government announced some fundamental changes to how individuals in defined contribution (DC) pension schemes can access their pension savings. At the same time they published the “freedom and choice in pensions” consultation to seek the views of interested parties on the measures announced.
On 21 July 2014, the government published its response to the consultation confirming that the more radical changes, allowing individuals to drawdown all their pension fund as cash will go ahead from April 2015. The response also provided further details on how those in defined benefit (DB) schemes can transfer to DC schemes once the changes come into force plus some protective measures.
It is worth recapping the main changes announced for 2014 and 2015. The immediate changes which took effect from Budget 2014 were as follows:
- The pension pot under which the whole pension pot can be withdrawn under the trivial commutation rules has increased to £30,000;
- The small pots arrangement again allowing full extraction of pension funds has been increased so that up to three pots with a value of £10,000 or less can now be taken in full;
- The age at which small pots and trivial benefits can be accessed has been reduced to 55;
- The amount which can be extracted by way of a capped drawdown has increased to 150% of an equivalent annuity; and
- The amount of guaranteed pension income needed to facilitate flexible drawdown has reduced from £20,000 to £12,000.
For those in DC schemes the main changes proposed from April 2015 were as follows:
- The 25% tax free lump sum will remain, but individuals will be able to access any amount they require from the pension scheme in anyone year. It is possible for the entire pension fund to be extracted at age 55. Any tax payable in respect of amounts exceeding the tax free lump sum will be charged at marginal rates not 55% as previously;
- Individuals will still be able to buy an annuity if they wish but the rules governing annuities will be relaxed to enable pension providers to create new types of annuity that more closely meet consumer needs;
- The trivial commutation and small pots rules will become redundant; and
- Individuals will be able to access free independent financial advice on their options at the point of retirement.
For those in DB schemes, the consultation process addressed whether transfer of funds to a DC scheme would be allowable, subject to trustee approval, giving those individuals access to the more flexible drawdown facility proposed from 2015. However, this was on the basis that members of unfunded public sector pension schemes would not be able to transfer out to a DC scheme except in exceptional circumstances. In the meantime, the trivial commutation and small pots rules would remain for those in DB schemes.
The published response shows that the broad consensus of opinion was that individuals should be allowed to access their savings in a way that suits them best. Having considered responses the government confirmed the following:
- DB to DC transfers will be allowed, although two new safeguards will be introduced. Firstly, members will be required to take independent financial advice before going ahead. Secondly, new guidance will be provided to trustees on the use of their existing powers and their options to deal with transfer requests;
- The transfer facility will not, as previously announced be available to those already drawing their pension and unfunded public sector pension scheme transfers will still be prohibited;
- The government will consult further on removing the need for individuals in DB schemes to transfer first to a DC scheme before accessing their funds;
- The introduction of a permissive statutory override which will allow pension schemes to ignore scheme rules and to follow the new tax rules instead allowing greater flexibility to drawing down pension funds without a need to amend pension scheme rules;
- A guidance guarantee funded by financial services firms will ensure that individuals are provided with professional and impartial advice on the options available to access their pension fund;
- The current flexible drawdown rules prevent an individual from securing tax relief at the marginal rate on further contributions to a pension scheme. Given these rules will cease to apply with the possibility of drawing down funds with a 0% charge, from April 2015, new rules will be introduced restricting further contributions to £10,000 p.a. for those who have chosen to drawdown more than their tax free lump sum and with pension funds exceeding that amount; and
- It is confirmed that the normal minimum pension age will increase from 55 to 57 from 2028 alongside the increase in the state pension age to 67.
A Pensions Tax Bill will be issued shortly for technical discussion with a view to its introducing in the Autumn.
The 2015 changes will provide greater flexibility in the management of funds in retirement and this will lead to an enhanced need for tax as well as investment advice. For many who are approaching retirement age, tax planning and compliance will become much more important. The government recognises the importance of ensuring that individuals are properly advised hence the introduction of the guidance guarantee which will put pressure on those involved within the pension sector to make sure that such a facility is in place by April 2015. Tax practitioners will need to work alongside pension advisers to make sure that best advice is provided especially to those who by accelerating the withdrawal of savings may find themselves exposed to tax.