Faye Jarvis, of-counsel in Hogan Lovells’ pensions team, has commented on the raft of ‘radical’ changes to the way in which members of defined-contribution (DC) pension schemes can access their benefits in the future, as announced by the chancellor in his 2014 Budget.
The changes are designed to give individuals more flexibility over how they take their benefits at retirement and to ensure they can make informed decisions about the choices available to them.
Jarvis said: ‘Whether members will be able to take full advantage of these changes will depend on the rules of their scheme. Employers can expect a flood of queries from members wanting to understand their options and so they will need to know what is currently permitted under the rules and what, if any, changes need to be made. Some employees may also decide to delay their retirement until all of these changes come into effect.’
The key proposals expected to come into force from April 2015 include:
- Ability for individuals to fully withdraw their DC pension pot from age 55, subject to their marginal income tax rate (rather than the current 55 per cent rate)
- All DC members to be offered free and impartial guidance on their options at retirement
- A ban on transfers from public service defined-benefit (DB) schemes to DC schemes (the government is consulting on whether this ban should be extended to private sector schemes)
Jarvis said: ‘While the increase in flexibility is to be largely welcomed, there must be a residual concern that some people will withdraw all of their pension savings at 55 and end up being left with nothing in their retirement. Whether the government will decide to introduce some form of safety net — perhaps by requiring individuals to invest a proportion of their fund in a product such as an annuity — remains to be seen.’
Nicola Rondel, of-counsel in Hogan Lovells’ pensions team, added: ‘While the introduction of a duty to provide free and impartial guidance to members at retirement is good news for IFAs, trustees and employers will want to understand who will be required to pay for the additional cost of providing this guidance. Will the government allow the cost to be met from members’ pots or will it require employers to pick up the tab — we suspect the latter is more likely.
‘Another big concern for employers and trustees will be to ensure that they cannot be held liable if the advice provided to members subsequently turns out to be poor.
‘We think the concerns about a mass exodus from DB schemes could be unfounded as there will always be a lot of people who want the security of a guaranteed level of income at retirement.’
In the meantime, certain changes to the existing system will come into force from 27 March 2014, including:
- An increase on the overall pension savings that can be taken as a lump sum from £18,000 to £30,000
- An increase in the size of a single pension pot that can be taken as a lump sum (regardless of overall pension savings) from £2,000 to £10,000
- An increase in the capped drawdown limit from 120 per cent to 150 per cent
- A reduction in the minimum income requirement for flexible drawdown from £20,000 to £12,000