On Monday the government published its response to its Freedom and Choice consultation issued as a result of the Budget. What are the main headlines?
There will be a new statutory override. Its aim is to ensure that defined contribution schemes which would otherwise be unable to offer full pot withdrawal, will be able to do so using the new provisions.
The government intends to consult on whether to allow full or partial withdrawal of funds under defined benefit schemes.
Normal minimum pension age will go up from age 55 to age 57 from 2028.
Trivial commutation (individuals can take up to £30,000 of total pension savings as a lump sum) and small pot lump sums (available for pots of up to £10,000) will continue to be available for defined benefit schemes, but the age at which an individual can make use of these rules will be lowered from 60 to 55.
Annuities will be more flexible; tax rules will allow the provision of retirement income on a decreasing basis and for lump sums to be taken. New retirement income products will be possible following future amendments to tax rules.
As with any increased flexibility, the government is concerned about inappropriate use and is proposing certain restrictions. In this case, the risk of people diverting their salary into their pension with tax relief, and then immediately withdrawing 25% tax-free, to avoid tax on their current earnings. It has proposed that those who choose to draw down more than their tax-free lump sum from a defined contribution pension arrangement will only be able to make further tax-free contributions to a defined contribution pension of up to £10,000 per year.
For members seeking to withdraw their defined contribution pot, there will be guidance provided by independent organisations such as TPAS. The FCA has published a consultation paper outlining its proposed standards alongside this government response.
DB to DC transfers
Transfers from defined benefit to defined contribution schemes would still be possible except in the case of transfers from unfunded public sector schemes.
Defined benefit members wishing to transfer to a defined contribution scheme will be required to take independent financial advice. In most cases the individual pension member will need to pay for the financial advice. However, responsibility for paying for the financial advice will fall on the employer if the transfer is from a defined benefit to a defined contribution arrangement within the same scheme, or as a result of an employer led incentive exercise.
There will be new guidance for trustees on the existing powers available to them regarding transfers, to maintain the sustainability of their scheme (such as the existing power to reduce the transfer value in certain circumstances).