Following the Budget announcements that no members of defined contribution (DC) pension schemes would have to buy an annuity in future – and that, indeed, they could take the whole of their savings in one cash sum at retirement – the Government issued a consultation about the new flexibility. The consultation closed in June and the Government has now issued its response.
Transfer values
The question in which many people have an interest is whether transfer values from private sector defined benefit schemes to DC schemes are to be banned. Fortunately sense has prevailed: people who have not yet started to draw their benefits will continue to be able to transfer out of defined benefit schemes – including funded public sector schemes such as the Local Government schemes – into DC arrangements if they wish to take advantage of the new flexibility. However,
- to protect individual members, they will have to take regulated financial advice first, from an adviser who is independent of the scheme, unless the value of their pension savings is less than £30,000;
- to protect defined benefit schemes (and members remaining in them), the Government will arrange for further guidance to trustees reminding them of the existing powers they have to reduce and/or delay the payment of transfer values in underfunded schemes.
The guidance guarantee
The Government has confirmed that the guaranteed free and impartial guidance, that will be available to all members of DC arrangements as they reach retirement, will be provided by independent organisations, including the Pensions Advisory Service (TPAS) and the Government’s Money Advice Service (MAS). This is in preference to organisations that might have a commercial interest in individuals reaching certain decisions. Guidance will be offered through a broad range of channels, including the internet, the telephone and face-to-face, and will be paid for by a levy on regulated financial companies.
The Financial Conduct Authority (FCA) have published a consultation (which closes in September) on the elements of the guidance guarantee for which they will be responsible:
- setting and monitoring the standards with which guidance providers will have to comply,
- making and enforcing rules on how contract-based schemes make members aware of the guidance services and
- adjusting the FCA’s existing conduct rules to support the introduction of the guidance guarantee and the new flexibilities.
Enhanced commutation
While members of defined benefit schemes will not have the same flexibility as DC members (unless they transfer to a DC arrangement), those whose total pension savings amount to less than £30,000 will still be able to commute any defined benefit pension they have and those with a defined benefit pension worth less than £10,000 will be able to commute it from age 55 (rather than age 60 as at present).
The Government intends also to consult further on whether defined benefit members who wish to take advantage of the new flexibilities should be allowed to do so directly from their defined benefit scheme, rather than having to transfer first to a DC arrangement.
Facilitating flexibility
Overriding legislation will be introduced so that all DC schemes can offer their members flexible access to their savings regardless of the existing provisions of the scheme. This will be permissive – allowing schemes to offer flexibility rather than requiring them to do so. However, to ensure maximum choice for members of schemes that choose not to offer full flexibility, individuals will be permitted to transfer between defined contribution schemes at any point up to their scheme’s normal retirement age.
Pensions tax rules will be amended to allow providers to develop new retirement income products that are tailored to the needs of individual consumers, including allowing annuities to decrease and allowing lump sums to be taken from annuities.
Further changes to the tax rules
In order to ensure that individuals cannot 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, changes will be made to the Annual Allowance régime. Those who choose to draw down more than their tax-free lump sum from a DC pension, where that pension is worth more than £10,000, will have a reduced Annual Allowance of £10,000 per year. (This will actually be an improvement for individuals in Flexible Drawdown, since they currently have a zero Annual Allowance.)
The £10,000 Annual Allowance will not apply to those in Capped Drawdown, unless and until they draw more than the capped amount.
The minimum age at which people can access their private pension under the new tax rules will be increased from 55 to 57 in 2028, when State Pension Age rises to 67.
The Government has concluded that the 55% tax charge on pension savings in a drawdown account at death will be too high when the new flexibilities are introduced next year. A further announcement will be made in the Autumn Statement.