What do the recent announcements mean for members and employers in relation to their pension scheme? In summary, easier access to your pension savings!
From 27 March 2014, a member’s benefits can be paid out of a scheme in full provided that the member’s total benefits in all registered pension schemes do not exceed £30,000. This represents a significant increase on the previous limit of £18,000 and will provide increased flexibility for many pensioners until the more significant changes scheduled for April 2015 come into force.
Changes to drawdown arrangements
After 27 March 2014 the maximum amount that can be taken as income each year as drawdown from a pension scheme will increase from 120% of the value of a comparable annuity to 150%. The minimum income requirement for a flexible drawdown arrangement (meaning the income that the pensioner must have from other sources to be allowed to take advantage of such an arrangement) will reduce from £20,000 to £12,000. These measures are designed to provide some increased flexibility until April 2015, when the total flexibility measures are intended to come into force, and it is therefore likely that there will be an increased interest in drawdown arrangements until that time.
Total flexibility on pension withdrawals from April 2015
Much reported in the media, these changes will allow members of a defined contribution scheme to take their entire pension pot at retirement and invest this in any way they wish. At present it seems that the intention is to keep the right to take 25% of this fund tax-free, with further amounts to be taxed at the pensioner's marginal rate rather than the 55% rate currently applied.
The major effect of this will be that pensioners no longer have to purchase an annuity on retirement, a product which many have considered to be poor value as of late, or rely on a drawdown arrangement.
There is a fear however that some may withdraw their money and make poor financial choices with this leaving them without sufficient provisions for the future and therefore reliant on state benefits. With this in mind, from 6 April 2015 a new duty will be imposed on pension providers and schemes, who will have to offer all defined contribution members guidance at the point of retirement.
The Government is to begin a consultation as to how this could be implemented. It will make a development fund of up to £20 million available to help get the initiative up and running but it seems easily possible that a significant cost burden could fall on schemes or providers.
Why the change?
The additional flexibilities have come as a surprise to most and the message that came along with these changes seems to acknowledge that the benefits built up in pension scheme are people’s savings and that they should be entitled to do as they wish with them. A suggestion that in the battle against pensions liberation schemes the Government has seen fit to put in place an alternative!
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.