Government response to Freedom & Choice paves the way for innovation – but there are key issues for providers, employers and trustees to contend with

Out-Law News | 21 Jul 2014 | 5:13 pm | 3 min. read

The pensions 'guidance guarantee', underpinning reforms to UK pensions which will give savers more freedom and choice about how they access their pensions, will be delivered by independent advisory bodies rather than product providers, the UK government has confirmed.

The announcement comes as part of the government's response to a consultation on the proposals, first announced as part of this year's Budget, and follows industry concern over how independent guidance could be guaranteed if it was to be delivered by product providers. The guidance guarantee will be funded through an industry levy, and can be offered online and over the phone as well as face to face, according to the government's response.

The guidance guarantee forms part of what the government has described as the biggest change to how people access their pensions in almost a century. In its response to March's consultation, the government said that this guidance would be provided by independent organisations which already provide support to consumers including the Pensions Advisory Service (TPAS) and Money Advice Service (MAS). The guidance will be free to consumers and funded by a levy on regulated financial services firms; and will be offered through a range of channels including face to face.

"Most of the responses to the consultation we saw were not in favour of product providers giving the guidance if impartiality had to be achieved, so the government has gotten this right," said insurance law expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com.

"Opening up delivery to a broad range of communication channels rather than just face to face should enable more people to access the guidance. That's all well and good – however, it depends what the messages will be as part of the guidance and we wait to hear about that. Finally, it will be incumbent on the providers of the guidance to ensure that they have good systems to cope with the numbers and hand off people to regulated advisers. This is all no easy task for these bodies to have up and running by April next year," he said.

The new regime, which will come into force in April 2015, will allow members of defined contribution (DC) pension schemes to access their savings in any way that they wish from the age of 55, subject to their marginal rate of income tax and without necessarily having to purchase an annuity. Pensions expert Tom Barton of Pinsent Masons said that the changes would "enable even greater levels of innovation in the retirement space".

"The new tax rules will enable even greater levels of provider innovation, leading to the creation of new products and packages to meet consumer needs throughout the duration of retirement. However, although members will benefit from 'freedom and choice' over how they access their pension savings, member education and high quality standards of governance are required from scheme providers and trustees to ensure that DC schemes provide good member outcomes."

The government has also confirmed that pensions tax rules will be amended to allow providers to develop new retirement income products that are tailored to the needs of individual consumers. Savers will still be able to withdraw up to 25% of the value of their pension pot tax-free on retirement, with any additional lump sum taxed at their normal marginal tax rate rather than subject to the existing 55% tax charge; and will continue to be able to purchase existing annuities, giving them a guaranteed income for the rest of their lives, with all or part of their pension pot if they chose to do so.

"The government has listened to the concerns of the providers and taken steps to encourage greater product innovation in the marketplace," said annuities expert Robert Lawrence of Pinsent Masons. "Its focus on annuities reflects the fact that they remain a central part of the retirement landscape in the UK, and the certainty they offer consumers can only be a good thing."

"Now that DC schemes have been transformed into something akin to a retirement savings account, employers will need to consider whether their schemes still satisfy the purpose they were established for," he said. "Schemes may need to be adapted to meet the strategic objectives of the business, and governance arrangements be reviewed to ensure that these remain appropriate. For some employers, the changes may also present an opportunity to consider new alternatives, such as collective DC schemes," Barton also said.

The government has confirmed that people with private sector defined benefit (DB) pension savings will continue to be able to transfer pensions not yet in payment to DC schemes subject to two new safeguards. These are a new requirement that the saver take advice from an impartial financial adviser, regulated by the Financial Conduct Authority (FCA), before a transfer can be accepted; backed with 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.

"This means that members will be able to make an educated choice about how they want to take their benefits," said Barton. "Although DB offers many advantages, the flexibility in the DC environment will be attractive to some."

"From an employer point of view, it will still be possible to proceed with liability management exercises that involve transfers. These exercises must be undertaken with care, but can help to reduce the burden of funding DB liabilities," he said.