Freedom and choice in pensions takes shape
HM Treasury's latest response to the consultation on pensions reform is assessed by Christine Scott.
If there is anyone left who is in doubt that the UK Government means business on pensions, HM Treasury's paper 'Freedom and choice in pensions: government response to the consultation' will put paid to this notion.
This latest paper provides considerable additional detail on the changes to pension decumulation, first announced at the 2014 Budget, which will be implemented from April 2015. The changes are wide-ranging and are intended to deliver:
- A new tax system for pension decumulation
- A pre-retirement guidance guarantee
- New arrangements for transfers out of defined benefit schemes
Early indications are that the details contained in this latest paper have been received by the pensions industry experts with a mixture of support and caution.
The ICAS Pensions Committee responded to the initial consultation and our response is available in the Technical section.
A new tax system for pension decumulation will feature:
- A statutory override to ensure that all defined contribution schemes are able to offer their members increased flexibility.
- The ability to transfer between defined contribution schemes, up to the point of retirement, if an individual's scheme does not offer flexible access.
- Changes to the tax rules to allow providers greater freedom to create new and innovative products which more closely meet consumers' needs.
- New tax avoidance measures to ensure that individuals do not use the new flexibilities to avoid tax on current earnings.
- An increase in the minimum age at which people can access their private pension under the new tax rules from 55 to 57 in 2028 to coincide with the rise in the state pension age to 67.
In addition the UK Government has taken the view that the 55% tax charge on pension savings in a drawdown account at death will be too high when the new system is established and more changes on this matter will be announced at the Autumn Statement.
With regard to social care and social security benefits, the intention is to continue to exclude capital held in a drawdown product from a capital means test and to treat the capital as generating a notional income for the purposes of income means testing. However, in view of these reforms, the UK Government intends to ensure that the notional income rules are consistent between drawdown products and annuities. Any changes are expected to be made before the new care and support charging rules for England are published in October. Social care is a devolved matter (with social security policy also devolved to Northern Ireland) and the UK Government should therefore be ensuring that it is discussing these changes with the devolved administrations.
Every individual with defined contribution pension savings will have a new right to free and impartial guidance at retirement to help them make decisions on how they use their pension savings in retirement. Although the guidance is to be tailored to individuals' personal circumstances it will fall short of independent financial advice and will not recommend specific products or providers.
To ensure that individuals receive timely impartial guidance:
- The guidance will be provided by independent organisations, with no actual, or potential, conflict of interest. The Financial Conduct Authority (FCA) will have responsibility for setting standards for guidance and monitoring compliance with those standards.
- The Government intends to bring together a range of delivery partners to deliver the guidance guarantee, including the Pensions Advisory Service and the Money Advice Service.
- Pension providers and schemes will be under a duty to ensure that they make people aware of their right to impartial guidance and signpost them to the guidance service as they approach retirement.
The guidance guarantee is to be funded by a levy on regulated financial services firms.
Defined benefit transfers out
Transfers from private sector defined benefit to defined contribution schemes (excluding pensions already in payment) will continue to be permitted but with new safeguards to protect both schemes and individuals. There will be new guidance for pension trustees on the use of their existing powers to delay transfer payments and individuals contemplating a DB to DC transfer will be obliged to take professional independent financial advice.
Transfers from funded public service defined benefit schemes (mainly the local government pension scheme) to defined contribution schemes will be permitted and safeguards similar to those in the private sector will be introduced where appropriate. Transfers from public service schemes which are unfunded will not be permitted.
The trivial commutation and small pot rules will continue to apply to defined benefit schemes. These rules allow individuals to take up to £30,000 of total pension savings as a lump sum, or a £10,000 small pot as a lump sum regardless of total pension wealth. The age at which an individual can make use of these rules is to be lowered from 60 to 55.
The next steps
The extent of the reforms mean that consultation and deliberation will be on-going. Two separate pieces of legislation are to be taken forward during the autumn: the Pension Schemes Bill (published on 26 June) and the Pensions Tax Bill.
The UK Government is to propose amendments to the draft Pensions Schemes Bill to introduce the new guidance guarantee and the Pensions Tax Bill will be issued for technical consultation in August 2014 before it is introduced to the UK Parliament.
The FCA has published a consultation paper, alongside the UK Government's response, on standards for the guidance guarantee, and related rules. The consultation closes on 22 September 2014.
Additionally, in respect of DB to DC transfers, the UK Government intends to consult on removing the requirement to transfer first to a DC arrangement when an individual in fact wishes to access their savings flexibly.