Freedom and Choice in Pensions

July 22nd, 2014

Following the two important Budget follow-up documents published on the 21stJuly 2014: the HMT Budget consultation response and the FCA consultation on guidance, the National Association of Pension Funds have provided us with some key highlights.

“Overall, we’re pleased with today’s developments which reflect three key themes where we have focused our lobbying since March:

  • Clarity on the funding and delivery of the new Guidance Guarantee
  • Ensuring that DB to DC transfers are permitted but with safeguards for both schemes and individuals

A proportionate solution to the threat of mass market exploitation of tax loopholes which the Government have been so concerned about

Headlines from the two documents are as follows:

A New Tax System 

• A permissive statutory override to allow all DC schemes to offer increased flexibility should they wish to

• Changes to the tax rules to create new and innovative products, including allowing annuities to decrease and allowing lump sums to be taken from annuities

Tax planning – those who choose to draw down more than their tax-free lump sum from a DC pension will have their annual allowance reduced to £10k for further contributions to a DC pension. This is a significant change from the expected response, which would have deferred entitlement to tax-free cash for ten years. We understand that this will not apply to future DB contributions and there will be a £10k de minimus

• The Government will increase the minimum age at which people can access their private pension under the new tax rules from 55 to 57 in 2028. It will consult on how to apply protections for current members.

The Guidance Guarantee

• Everyone with DC savings will have a new right to free and impartial guidance at retirement. This guidance will be tailored to individuals’ personal circumstances but will not recommend specific products or providers. It will be available through numerous channels.

• This guidance will be provided by independent organisations. The FCA will have responsibility for setting standards for guidance and monitoring compliance with those standards. The FCA’s consultation paper sets out its proposed standards.

• Pension providers and schemes will be under a duty to ensure that they make people aware of their right to impartial guidance and signpost them to the guidance service as they approach retirement.

• The Government will bring together a range of delivery partners including; The Pensions Advisory Service (TPAS) and the Money Advice Service (MAS). A team has been established within the Treasury to lead this work, drawing expertise from across government and from TPAS and MAS.

• The Government will legislate to establish a levy on regulated financial services firms to fund the cost of the guidance service.

Defined Benefit Schemes

• The Government will continue to allow transfers from private sector defined benefit to defined contribution schemes (excluding pensions that are already in payment).

• The Government will introduce two new safeguards to protect individuals and pension schemes: a new requirement for an individual to take advice from a professional financial adviser before a transfer can be accepted; and new guidance for trustees on the use of their existing powers to delay transfer payments and take account of scheme funding levels when deciding on transfer values.

Transfers from funded public service defined benefit schemes (ie the LGPS) to defined contribution schemes will be permitted and safeguards similar to those in the private sector will be introduced.

• The trivial commutation and small pot rules will continue to apply to defined benefit schemes. The age at which an individual can make use of these rules will also be lowered from 60 to 55.”

To find out more please click here to visit the NAPF site.