Pension Changes - Freedom and Choice

The government has now published more detail on its pension changes and the results of its consultation on “freedom and choice in pensions.”

The principles that underpin these reforms are:

Fairness – The tax consequences should be fair to all, as in pensioners and those who pay current tax.

Choice – This should be placed back with the individual

Proportionality – Administrative consequences should be borne by individuals, insurers, pension schemes and government alike.

Some of the points remained unchanged, some we have further clarity on and in others the new proposals still remain unclear:

These are the key issues from the proposals:

Guidance versus advice

It would appear that the guidance service that will be offered from April 2015 will be delivered by a number of partners including The Pension’s Advisory Service (TPAS) and the Money Advisory Service (MAS). It has already been commented that these organisations are not resourced to be able to deal with the volume of enquiries that will come their way in April 2015. In addition consumers will be further confused as to guidance versus advice since it is noticeable that both of these services have advice in their title. The cost of this service this will be borne by financial services firms by way of a levy.

Tax Charges on Death

It is stated once again that the government is clear that the 55% tax charge on pension savings in a drawdown account on death will be too high when the new system is established in 2015. Commentators are hoping that the present 55% will be reduced to say 40% which is in line with the present inheritance tax charge. The government however only intends to announce the changes to this at the Autumn Statement.

Minimum Pension Age

The government have confirmed that they will increase the minimum age at which people can access their pensions under the new tax laws from 55 to 57 in 2028, this is in line with the increase in the state pension age. The minimum age will then follow the increasing state pension age, but will remain at 10 years below state pension age. The exceptions are public sector schemes that do not link their normal pension age to state pension age such as fire-fighters, police and armed forces.

Annual Allowance

In order to combat the potential for recycling money that is drawn from pension schemes by way of a tax relieved contribution back into schemes with immediate withdrawal of 25% tax free cash, the government have introduced a new annual allowance of £10,000. This will apply to those in flexible drawdown already from April 2015, with these benefitting from not currently being able to contribute to having a £10,000 allowance. This will be the new annual allowance for all who take benefits post April 2015 that draw above their tax free cash limits. Those currently in drawdown who would have a £40,000 allowance will be grandfathered over to allow this to continue post April 2015 unless they draw more than their cap. How this cap will be monitored is unclear, so formal pension reviews may remain for certain clients.

Flexibility in Annuities

The government has also thrown a life line for annuity providers. The ten year restriction on guarantees is removed. The annuity can pay out for any period after the members death provided it is set out in the annuity contract. They are also going to allow for annuities that can change (to go down as well as up) in payment value, for example when the state pension became payable. Whilst all this sounds like paradise this increased flexibility will obviously come at a price which in turn may likely result in a lower income. However, annuities will remain a valuable option for certain individuals.

Defined Benefit/Final Salary Transfers

There has already been much debate about the restrictions that were to apply to the transfer of defined benefit schemes. The government have confirmed that they will allow transfers to the new flexible arrangements for defined benefit schemes other than those government schemes which are unfunded.

They have introduced two new safeguards to protect against individuals who may be encouraged to leave those guarantees. The first is that an individual must take advice from a professional financial adviser who is independent from the defined benefit scheme and authorised by the Financial Conduct Authority (FCA) before a transfer can be accepted. There will also be new guidance to the trustees on the use of their existing powers to delay transfer payments and take account of scheme funding levels when deciding on transfer values.

For certain individuals such as those to whom death benefits are very important defined benefit transfers could still be the correct answer, but receiving financial advice will be key to the decision.

Practical Steps

It should also be noted that government intend the legislation to allow for this flexibility regardless of an individuals schemes rules. However, it would appear that not all providers will look to offer the flexibility. We suggest that you check with your pensions provider to establish if they will offer the full range of options.

Further information and guidance will become available, as the draft legislation is open for consultation. To read more about the pension changes click the HMRC website. The pension changes will be introduced in the Autumn Statement in a Taxation of Pensions Bill.

To discuss the pension changes and how they will affect you then please contact Kerry Houghton on 01772 550614. See more at: