Out-Law News 3 min. read
20 Mar 2014, 10:18 am
Measures announced as part of the 2014 Budget would encourage retirement saving by giving pension scheme members greater freedom and more sensible tax treatment, according to pensions expert Simon Laight of Pinsent Masons, the law firm behind Out-Law.com.
The changes will mostly affect DC pension schemes, under which the benefits provided on retirement depend on the performance of the saver's investment. Some of the changes will take effect from next week, while the government is consulting on the more fundamental changes, which would come into force in 2015.
"This is a charter for product providers to develop retirement income products, particularly the guaranteed income products that form a key plank of Pensions Minister Steve Webb's defined ambition proposals," said Laight. "Treasury and the Department for Work and Pensions seem to have been talking to each other."
"Giving complete flexibility to empty the retirement pot in one go brings the risk of spending it all at once and then having folk fall back on the state. But the government clearly trusts its people to do the right thing and use the pots sensibly. Also, the government seeks to contain the risk by the 'guidance guarantee' - requiring DC schemes to provide free financial guidance at the point of retirement. That will be a headache for schemes to deliver but should help the public make better decisions," he said.
The Chancellor has described the changes intended to be introduced from April 2015 as "the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921". Under the proposals, savers would be able to access their DC pension savings as they wish from the age of 55. All savers would be offered free and impartial face to face financial guidance at the point of retirement, backed by a new legal duty on pension providers and trust-based pension schemes to offer this guidance guarantee.
Savers would still be able to take up to a quarter of the value of their pension pot tax-free on retirement, as is the case today, with any additional lump sum taxed at their normal marginal tax rate rather than the existing 55% tax rate. They would then be able to purchase an annuity if they chose to do so, or alternatively would be able to keep their pension invested and access the balance over time.
The changes will also have some implications for defined benefit (DB) schemes, which pay set benefits on retirement. Those in public sector schemes, which tend to be largely unfunded, will be prevented from transferring out of DB arrangements to take advantage of the new flexibilities in DC schemes except in very limited circumstances.
Pensions expert Simon Laight said that it was "overstating the case" to say that these changes would end the market for annuities. Savers have been able to choose not to convert their pension pot, or part of their pension pot, into a regular income through an annuity since 2011; while the policies would remain "the right choice" for many people, especially those entitled to an enhanced annuity because of an underlying health condition, he said.
"The free financial guidance will direct some people to annuities," he said. "In addition, life companies can redirect their hedging and investment science to developing guaranteed drawdown products, with many of the stumbling blocks now removed. Also, liberated pension money will find its way into life bonds where there is the advantageous tax treatment of top-slicing to take regular income tax-free and gross roll-up if the bond is off-shore; or it can find its way into existing and new products for long-term care."
"For the consumer, these are welcome changes. For pension providers, here is a charter to innovate new products for a freed-up market," he said.
In the meantime, DC pension scheme members will be given more flexibility over their pension savings from 27 March. From this date the government will cut the minimum income requirement for accessing flexible drawdown from £20,000 to £12,000 where scheme rules permit; raise the capped drawdown limit from 120% to 150%; increase the size of the lump sum that can be taken from small individual pots, regardless of total pension savings, to £10,000; and almost double the maximum that can be taken as a lump sum, to £30,000.