The 2014 Budget includes a number of “radical reforms” which, the Government suggests, will give members of defined contribution (DC) schemes greater freedom over how they access their pension savings.
The Chancellor has announced that the changes will be introduced in two parts. Transitional changes will be introduced on 27 March 2014 with wider changes due to come into force in April 2015, following a consultation.
From April 2015, the Government proposes that there will be no restrictions on an individual’s ability to draw down from their defined contribution pension pots after age 55, allowing individuals to access their benefits in full without purchasing an annuity. It is proposed that there will be no limit on the annual amount someone can withdraw from their arrangement and no minimum income requirement. Furthermore, rather than the current 55% charge for full withdrawal, individuals will be charged income tax at their marginal rate.
Everyone will have access to full withdrawal, an annuity or drawdown, and potentially other products created by providers.
Also from April 2015, all individuals with DC pension pots will, at the point of retirement, be offered impartial, face to face guidance, which is free to the individual. The Government will introduce a new duty on pension providers and trust-based pension schemes to deliver this ‘guidance guarantee’ intended to take effect from April 2015.
In preparation for the more radical reforms, for pension years that start on or after 27 March 2014, the capped drawdown limit will increase from 120% to 150% of an equivalent annuity.
Where a member meets the minimum income requirement for flexible drawdown, there is generally no limit on the annual amount which can be withdrawn. The minimum income requirement is the minimum level of income that a member must have from other sources before he can take advantage of flexible drawdown. The minimum income requirement has also been reduced from £20,000 to £12,000 from 27 March 2014.
From 27 March 2014, small pension pots with a value of up to £10,000 can be taken as a lump sum, regardless of the member’s total pension wealth. This is an increase from the current maximum size of £2,000. It will also be possible for up to three small pension pots to be taken as lump sums, an increase from the current maximum of two pots.
From 27 March 2014 it will also be possible for members with a total pension wealth of under £30,000 to receive their benefits as a lump sum under the trivial commutation provisions. Previously, the maximum amount of pension wealth which could be taken as a lump sum in this manner was £18,000. This is however subject to the rules of the scheme to which the member belongs.
Prohibition on DB to DC scheme transfers
The Government also intends to legislate to remove the right of members of DB schemes to transfer to a DC scheme, except in exceptional circumstances. This proposed change forms part of the consultation.
Schemes may wish to review their Trust Deed and Rules in light of the transitional changes which entered into force on 27 March 2014.
The consultation on the future changes (due to come into force in April 2015) is expected to last until 11 June 2014.