Auto enrolment and the Budget 2014

The Budget 2014 saw a radical overhaul of rules for defined contribution pension schemes, which is hugely relevant to auto enrolment, as many of the schemes which will be used to satisfy the qualifying regulations, will be defined contribution.

Pensioners will no longer be automatically guided to purchase an annuity, which many perceive as poor value for money. Instead, they will have complete flexibility to take lump sum payments from their pension funds, drawdown further sums at a later date or to buy an annuity. It will still be possible to take one quarter of the pension pot as a tax-free lump sum but further amounts will be taxed at the individual’s marginal rate of tax.

The direct cost of establishing and maintaining a qualifying auto enrolment scheme will fall directly on to employers and the hard cost of contributions will likely be borne by both employers and employees. As such, SME’s will be affected proportionally harder by the complexity of auto enrolment legislation and it is imperative that advice is taken to ensure that harsh penalties, for non-compliance, are avoided. The relaxation of pension rules and the increased flexibility it allows will be welcomed by those nearing retirement age who want to get the most out of their pension savings. It will provide some comfort to those with more modest pension pots but the risk remains if too much is taken too early, a lower standard of living may be experienced in the later years of retirement.