[co-author: Suhasini Gunasena]
The government has published its response to the ‘Freedom and choice in pensions’ consultation. Individuals aged 55 or over will be able to access their entire DC pension flexibly. This will be underpinned by the ‘guidance guarantee’ which will be provided by independent organisations rather than pension schemes or providers. Transfers from private sector DB schemes to DC schemes will continue to be allowed as will transfers from funded public sector DB schemes, subject to two safeguards.
Decide whether your scheme is going to offer some or all of the pension flexibilities which will be available.
Review investment options available for DC funds in light of the new flexibilities.
Become familiar with the guidance guarantee and the timing of the requirements and ensure that the necessary systems are in place at the appropriate time.
Following communications with members about the Budget 2014 changes, follow up with further communications to members about the guidance guarantee and what it means for them.
DB transfer procedures will need to change and new procedures for DB to DC transfers will need to be agreed with administrators.
Arrange trustee training on the new guidance about the safeguards for DB schemes whose members wish to transfer their DB savings to DC.
The Financial Conduct Authority consultation on the guidance guarantee proposals is open until 22 September – use the link at the end of this alert for more information on how to respond.
Unrestricted access to DC pension savings from April 2015
From the age of 55, individuals will have the option to:
take their pension savings as cash;
buy an annuity (or other income -generating guaranteed products that may come onto the market); and/or
use drawdown but without any limit being applied.
Flexible access - permissive statutory override
The consultation sought views on whether a compulsory statutory override should be introduced to require pension schemes to offer flexibility to their members. The Government has decided to introduce a permissive statutory override, which will allow, but not require, schemes to bypass their scheme rules and follow the tax rules instead in order to pay out payments flexibly or to provide a drawdown facility. To facilitate this approach, the right to take a cash equivalent transfer value will be extended up to normal retirement age, rather than having to take it twelve months before retirement. The right to allow individuals to transfer between schemes will be extended right up until the scheme’s normal retirement age as well.
Minor changes to trivial commutation and small pots
Under the new system, the trivial commutation and small pots rules which came into effect from 27 March 2014 will continue to apply to DB schemes. This allows individuals to take up to £30,000 of total pension savings from a DB scheme as a lump sum and a small pot of up to £10,000 as a lump sum, regardless of their total pensions savings.
In addition, the age at which members of a DB scheme will be able to make use of the small pot and trivial commutation rules will be lowered from age 60 to 55.
The guidance guarantee - a new duty on independent third parties
In the Budget 2014, the Government announced that individuals with a DC pension should be entitled to free impartial guidance at retirement - the ‘guidance guarantee’ - to help them ask questions about their options, but not make specific recommendations about their pensions. Details of the guidance guarantee and how it will work are set out in The Financial Conduct Authority’s consultation paper; see the link at the end of this alert for further information. This service will be delivered by independent third party organisations, such as The Pensions Advisory Service and the Money Advice Service.
The Financial Conduct Authority will set up and maintain the standards for the service providers, monitoring compliance with those standards and collecting the levy, which will fund the guidance provision and is currently consulting on how the guidance guarantee will be delivered and funded.
Scheme trustees and contract-based pensions providers will be required to inform their members of the availability of the guidance and how to access it.
The key points of the guidance guarantee are:
everyone with a DC pension pot will be able to access free (at the point of delivery) impartial guidance, including the option of a face-to-face meeting, although other options such as web-based and telephone guidance will be available;
it will not be compulsory for people to take this guidance to access their pension savings, but they will be signposted to the guidance service before they do. Notifying members of the guidance option will be obligatory, but whether they take up this offer is up to them;
this service cannot make recommendations to the individual and is not a substitute for independent financial advice given by regulated advisers and one of the functions of the guidance is to inform individuals about the option of seeking additional specialist help, for example regulated help or debt advice;
transitional provisions will be introduced to ensure that those receiving pension information packs before April 2015 do not miss out on being offered this guidance;
the delivery providers will not be subject to FCA authorisation, instead they will be governed under a separate standards regime which will be contained in new legislation;
in its parallel consultation paper, The Financial Conduct Authority is consulting on details such as consumers being notified that they can access the guidance service on a ‘per pot’ basis and regarding the timing of the provision of guidance; and
the Government will continue to consult on whether this guidance should also be offered to individuals earlier on and not just at the point of retirement.
Controversially, the funding of the guidance service will be achieved by a levy imposed on financial services firms and those operating in the pensions market, not by pension schemes or their sponsors. The levy will be collected by The Financial Conduct Authority.
Transfers from private sector and funded public sector DB schemes allowed
Transfers out of DB schemes will continue to be allowed, although the ban on transfers of pensions in payment will continue. This will be subject to two additional requirements:
it will be a statutory requirement for all individuals who are considering transferring out of DB schemes to take advice (rather than guidance as for DC members) from a professional financial adviser who is independent from the pension schemes and authorised by The Financial Conduct Authority. The individual will have to pay for the advice, unless the transfer is from a DB section to a DC section of the same scheme or as a result of an employer-led incentive exercise. This advice requirement will not apply to small pot holders with savings below £30,000; and
the Government will work with the Pensions Regulator, employers and trustees to produce new trustee guidance on the powers available to trustees to maintain the stability of their schemes as a result of these changes.
The Government has said it will consult on whether the requirement to transfer first to a DC scheme should be removed for private DB scheme members who wish to take advantage of the new flexibilities.
Changes to the tax rules to allow new products onto the market
The consultation sought views on how best the new tax system could be structured to allow greater choice for individuals and encourage new products to come onto the market. Whilst the response underlines that annuities will continue to be the best retirement option for the majority, the Government’s view was that many of the restrictions in the tax rules and pensions legislation need to be amended.
The Government intends to:
allow lifetime annuities to decrease (eg step down at State Pension Age);
allow lump sums to be taken from lifetime annuities;
remove the ten-year guarantee period for guaranteed annuities; and
allow payments from guaranteed annuities to be paid to beneficiaries as a lump sum, where they are under £30,000.
There will be new anti-avoidance measures to prevent abuse of tax relief when the new freedoms come into effect. This is to close a loophole that would have allowed an individual aged 55 or over to divert their salary each year into their pension, take it out immediately and receive 25% of it tax-free, so avoiding Income Tax and National Insurance contributions.
Under the new measures, those who take more than their tax-free allowance - or 25% of their fund - from the age of 55 will be subject to a lower annual allowance of £10,000, down from the maximum of £40,000. However, the reduced allowance will apply only to pension pots worth more than £10,000.
Increasing normal minimum pension age
The age at which an individual can take their private pension savings under the tax rules will increase from age 55 to age 57 by 2028, alongside the increase to State Pension Age to age 67. The Government has confirmed its intention to increase the minimum pension age to age 57 in 2028 and has confirmed that it will then remain ten years below the State Pension age.
The minimum pension age increase will not apply to the public service schemes for Firefighters, Police and the Armed Forces, but it will apply to all other public sector schemes.
Government confirms 55% tax rate on death too high
The Government has deferred a decision on reducing the rate of tax, currently at 55% on pensions savings held in a drawdown product at the time of death or which have not crystallised after age 75, until the Autumn Statement.
Click here for the full Government response document, ‘Freedom and choice in pensions’.
The consultation paper on the Guidance Guarantee published by the FCA is available here. The consultation closes on 22 September 2014.
Date for your diary
Rewriting the rules on retirement income, Thursday 18 September, 12.30-2.00
What do you need to do, to be ready for April 2015? What will the ‘guidance guarantee’ mean in practice? How much flexibility will schemes have to provide to members? What impact will the new DC flexibility have for DB schemes and for DC investment strategies?
Schemes will have a relatively short time to update their rules, practices and member communications for ‘the most fundamental change to the way people access their pension in almost a century’.