Pension flexibility from April 2015 gets the green light

The response outlines the decisions that the Government has taken in order to give individuals greater flexibility when accessing their pension savings from April 2015, but the key points are as follows:

Defined Contribution (DC) scheme flexibility

From 6 April 2015, members of DC registered pension schemes will be able to draw down on their pension savings whenever and however they wish after the age of 55.

The tax-free pension commencement lump sum (usually 25% of an individual’s pot) will continue to be available but any amount in excess of this tax-free lump sum will be treated as income and subject to income tax at their marginal rate(s).

From 6 April 2015, members of DC registered pension schemes will be able to draw down on their pension savings whenever and however they wish after the age of 55.

Those who want the security of an annuity will still be able to purchase one. However, those who do not want to purchase an annuity or withdraw their money out in one go, and who would therefore prefer to keep their pension fund invested and access it over time, will still be able to purchase a drawdown product.

DC Transfers

To ensure maximum choice up to the point of retirement, the government will amend the tax and pensions legislation to ensure that the statutory right to transfer from one DC scheme to another will be extended from one year before the scheme’s normal retirement age to the scheme’s normal retirement age.

Annuity Changes

The government is clear that annuities will remain the right choice for many at some point during their retirement, although they also acknowledge that there is a clear demand for more flexibility to allow new

products that fit with the changing nature of retirement.

The government therefore intends to change the current tax rules in order to:

• Allow lifetime annuities to decrease in payment. This will allow providers to offer products which meet individuals’ needs more closely, for example by allowing annuity payments to reduce once an individual becomes eligible for the State Pension
• Allow lump sums to be taken from lifetime annuities, on the condition that this is specified in the contract at the point of purchase. This will allow providers to structure much more flexible products that are capable of meeting specific circumstances, such as care needs
• Remove the ten-year guarantee period for guaranteed annuities, which will allow payments made to beneficiaries from guaranteed annuities to continue beyond the current ten year maximum. This will allow providers to create annuities that ensure more of an individual’s fund is returned to their families in the event of their death; and
• Allow payments from guaranteed annuities to be paid to beneficiaries as a lump sum, where the value is under £30,000. This will allow beneficiaries to receive pension payments as a lump sum if they wish, rather than having to spread these out over several years.

£10K money purchase annual allowance for pension contributions

A money purchase annual allowance (AA) of £10K for defined contribution (DC) savings will apply to anyone who takes advantage of the new pension flexibility rules after 5 April 2015 (unless the DC fund is valued at no more than £10K and is being commuted under the small pot rules).

The trigger for invoking the £10K money purchase annual allowance will be the first time that someone takes benefits ‘flexibly’ after 5 April 2015, over and above the initial tax-free lump sum. This reduced AA will not apply to people buying an annuity and individuals already in capped drawdown on 5 April 2015 will not be subject to this reduced AA either, unless they subsequently withdraw more than the capped amount after this date.

Normal Minimum Pension Age

The government will increase the normal minimum pension age (NMPA) from 55 now, to 57 from 2028, alongside the increase in State Pension age to 67. Thereafter, the NMPA will remain ten years below State Pension age. The government is clear that this increase should also apply to public

service pension schemes, but not to public service schemes for Firefighters, the Police and the Armed Forces.

Defined Benefit (DB) schemes

Transfers from private sector DB to DC schemes (excluding pensions already in payment) will still be allowed, but only if the individual has first received independent financial advice from a professional financial adviser who is independent from the DB scheme and authorised by the FCA.

Transfers from funded public service DB schemes to DC schemes will also continue to be permitted but transfers from unfunded public service schemes will be banned. A further consultation will also be issued by the government to determine if full or partial withdrawals from a DB scheme (thus enabling a type of flexible drawdown under DB schemes) should be permitted. If this was permitted, this could alleviate an unnecessary burden on DB schemes having to arrange lots of transfers-out to DC schemes, for those who do wish to take advantage of the new pension flexibility.

Death benefit tax charge to come down from 55%

The 55% tax rate on lump sum death benefits paid from crystallised pots will be reduced. The new tax rate will be confirmed in the Autumn Statement but this reduction

should encourage more people to seek sustainable income models, rather than strip their funds out to avoid a 55% tax charge on death.

The forthcoming changes will mean that pension savers will no longer be faced with overly complex and restrictive rules on how they can access their pension pots and the simpler rules should make drawdown cheaper. For those who do want to take advantage of the new flexibility though, increased freedom and flexibility will mean that important decisions loom on the horizon. What to draw and when, how much to spend and where to invest must all be carefully considered so good quality advice will be critical.

Buying an annuity, however, should still remain the right choice for many at some point during their retirement, especially now that the government have given providers the green light to offer more flexible annuity products than those that are currently available.

Accessing pension benefits early is not suitable for everybody and is likely to reduce your income at retirement. It is important to carefully review your individual circumstances before making a decision