Freedom of choice for pensions 2015

Jul 28, 2014   Posted by Michael Bailey

2015 pension freedom gets the green light

Recently the Government gave a clear green light to the radical rewriting of the pension rule book. The Government response to the 2015 ‘freedom & choice’ consultation delivers on the Chancellor’s Budget promise of much more DC pension flexibility and provides further detail on some of the changes in store from next April. Advisers can now start planning in earnest to ensure clients make the most of this new pension freedom when it comes.

Today’s announcement confirmed:

  • DC flexibility will go ahead from April 2015.
  • A £10k AA will apply after a client accesses flexibility, to counter abuse of the new freedom.
  • The guidance guarantee will be delivered by a range of independent providers, including MAS and TPAS.
  • Tax-free cash will stay at 25%.
  • DB transfers will still be allowed – but only after professional advice.
  • Death benefit tax will come down from 55% – new tax rate to be confirmed in Autumn Statement.
  • Normal minimum pension age is going up to 57 from 2028.

DC income flexibility from April 2015 The headline income flexibility will go ahead as promised. Clients of pension age will be able to take what they want from their DC pension pot, when they want it. The key is using this new flexibility sensibly to meet financial needs tax-efficiently – which is where professional advice comes into its own.

Clients will have a new right to transfer to a new scheme or provider to access DC flexibility where their current scheme doesn’t offer it. In particular, existing restrictions will be lifted so that members of occupational schemes will now be able to transfer at any point up to their scheme’s normal pension age.

And existing ‘secure income’ rules will be relaxed to allow income providers to innovate when designing new income solutions to meet changing client needs.

Anti-avoidance controls Once a client has accessed the new flexibility, their pension annual allowance will drop to £10k. The trigger for this drop in AA will be when a client first starts taking drawdown income.

Taking a secure income, or solely taking tax-free cash, won’t trigger the AA cut. Neither will accessing a DC pot worth less than £10k under the ‘small pot’ rules. Existing ‘capped drawdown’ users on 5 April 2015 won’t be caught, as long as their drawdown income remains within the income cap, and existing ‘flexible drawdown’ users will benefit from the £10k AA.

This is to prevent over 55s abusing the new flexibility at a yearly cost to the Exchequer of up to £24Bn, so is an understandable, pragmatic, and proportionate, solution in the circumstances.

Government estimates only 2% of pension savers will be affected, so this won’t damage the auto-enrolment initiative to boost private pension saving. And it creates planning opportunities for those wealthier savers who might be impacted. Filling the pension wrapper first should largely mitigate any adverse impact when the time comes to access the new flexibility.

Guidance guarantee Savers will have access to free, impartial guidance on their pension income choices from a range of independent providers with no vested interest in selling a financial product or service, including MAS and TPAS. The guidance won’t be FCA-regulated, but FCA will set standards for guidance providers and monitor compliance with those standards. Other providers who can meet the required standards are welcome to participate, to encourage competition and innovation.

Schemes and providers will have a new duty to make ‘at retirement’ clients aware of this guidance option and give them sufficient information about their pension pot to help them make sense of the guidance. Guidance isn’t intended to replace professional advice: indeed, it should act as a gateway to advice for those who need it.

The new guidance guarantee will be funded by £20M from Government and a levy on regulated firms.

Tax-free cash Today’s announcement included welcome reassurance that the Government won’t tamper with the right to normally take 25% of a DC pension pot tax-free. This should give clients more confidence to keep their retirement savings inside the tax-advantaged pension wrapper until they’re needed.

DB transfers Pre-retirement members of funded DB pension schemes will be allowed to transfer to DC to access the new income flexibility if they want to. But only if they’ve taken advice from an independent FCA-regulated professional first.

Most DB members are likely to be best served by sticking with what they’ve got. There are, however, members whose needs will be better met by moving to the new flexibility – particularly wealthier savers who value tax-planning flexibility and wealth transfer options over a guaranteed income.

The existing ban on transfers once benefits are in payment will continue. And members of unfunded public sector DB schemes won’t be able to transfer to DC.

There will be an exemption from the advice requirement for those with rights worth less than £30,000 looking to use the triviality or small pot rules, which will be available from age 55 from 2015.

Death benefit tax to come down from 55% The tax rate on lump sum death benefits paid from crystallised pots will be cut from the existing 55%. The new tax rate will be confirmed in the Autumn Statement.

This should encourage more clients to seek sustainable income models, rather than strip their funds out to avoid a 55% tax charge on death. Again, advice will be central to obtaining the most tax-efficient outcome to meet clients’ needs.

Pension age – going up Normal minimum pension age will increase to 57 in 2028, when the State pension age goes up to 67. This will affect anyone born after March 1973.

Going forward, the minimum pension age will be linked to 10 years before State pension age.

Existing special rules for the Armed Forces and Emergency Services will continue, but the Government is considering how best to treat others with protected low pension ages.