In yesterday's Budget the Chancellor announced radical changes to pensions. The most radical one only directly applies to defined contribution schemes or "money purchase" schemes.
In more detail - the annuity requirement
The main change is that from 2015 individuals will have the choice to take some or all of their pension saving as cash at any age from 55 onwards. They will pay tax on this but only at their marginal rate at the point of income. Carefully structured, drawing from one fund could be combined with deferring another pension and state pension to produce significant tax savings.
This removes one of the structural rules of UK pensions – the requirement to use pension saving to buy an annuity. Over the next year the Government will examine all the knock-on effects and decide which ones it can tolerate. It has already flagged up that it will ban most public sector workers from transferring their final salary pensions to a DC scheme to take the pension as cash.
They are not sure whether they will need to do this for private sector schemes - on the one hand they see the benefits of their own idea to allow members freedom to manage how they use their retirement fund; on the other hand they are concerned that a rush of transfers could cause dis-investment by schemes that has an adverse effect on investment markets.
This new "flexibility" also reverses the position taken by public authorities (both the Pensions Regulator and HMRC) that transferring members to schemes which allow them to cash out their benefits is an abuse of the current system - the advisers promoting this practice (known as "Pension Liberation") have been depicted as scorpions and the Budget contains some HMRC powers to police the problem. The main difference with the government's proposals is the requirement of a minimum age from which funds can be accessed.
There are a lot of major questions to be answered over the next year. The most technical is how this interacts with the changing rules on what is a "money purchase" benefit and what is a "money purchase" scheme. At the first level this affects whether members who think they will be allowed to take their fund as cash will actually be allowed to do it. But if it also triggers a transfer ban this will be a lose-lose for members and employers. It also leads to a bizarre circle of rules where a scheme provides for internal annuitisation. Will a transfer ban produce a rush to beat it? Will final salary schemes let their members convert to money purchase without transferring out? Currently this is allowed with informed consent but rarely happens because it is generally ill-advised because of unfavourable annuity rates. With the new changes it may well be in a member's interests to convert because of the cash option it opens.
The knock-on effect in bankruptcy cases could be significant - generally the trustee in bankruptcy will be obliged to require a pension scheme member to take all their benefits straightaway and pay them to creditors.
The Budget also introduced some immediate (from next Thursday) flexibility which mainly takes existing easements and increases their impact by changing monetary limits. So the current rules that anyone can take their pension pot as cash if it is worth less than £2000 and they have only 2 such funds becomes £10,000 and 3 such funds. The £18,000 lump sum threshold for lump sums on winding up or trivial commutation becomes £30,000. The administrative challenges in dealing with these changes are significant and 1 week's notice shows a deep lack of understanding of the quality control practices and systems programming procedures involved in implementing them.
Another new rule will be a requirement on pension providers and money purchase schemes to give every member free face to face advice at retirement. For money purchase pension schemes this will be a major cost and, if there is no duty on an employer to meet the cost, it will effectively be paid for by the members themselves. For the government the point to note here is that the advice is likely to focus on the increased scope to reduce income tax in retirement which they have created. The scorpions may still have a sting in their tails.
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