On Monday the Government gave a green light to the radical rewriting of the pension rule book. Their response to the 2015 freedom & choice consultation delivers on the Chancellors Budget promise of much more pension flexibility and provides further detail on some of the changes in store from next April.
As advisers we can now start planning in earnest to ensure clients make the most of this new pension freedom when it comes.
Mondays announcement confirmed:
- Defined Contribution (money purchase) flexibility will go ahead from April 2015.
- A significantly reduced 10,000 Annual Allowance (AA) will apply after a client accesses flexibility, to counter abuse of the new freedom.
- The guidance guarantee (free advice) will be delivered by a range of independent providers, including Money Advice Service (MAS) and The Pension Advice Service (TPAS).
- Tax-free cash will stay at 25%.
- Defined Benefit transfers will still be allowed – but only after professional advice.
- Death benefit tax will come down from 55% – new tax rate to be confirmed in Autumn Statement.
- Normal minimum pension age is going up to 57 from 2028.
Defined Contribution (DC) income flexibility from April 2015
The headline income flexibility will go ahead as promised. Clients of pension age will be able to take what they want from their DC pension pot, when they want it. The key is using this new flexibility sensibly to meet financial needs tax-efficiently – which is where professional advice comes into its own.
Clients will have a new right to transfer to a new scheme or provider to access DC flexibility where their current scheme doesnt offer it. In particular, existing restrictions will be lifted so that members of occupational schemes will now be able to transfer at any point up to their schemes normal pension age.
Once a client has accessed the new flexibility, their pension annual allowance (AA) will drop to 10,000; the trigger for this drop in AA will be when a client first starts taking drawdown income. Taking a secure income, or solely taking tax-free cash, wont trigger the AA cut.
Existing capped drawdown users on 5 April 2015 wont be caught, as long as their drawdown income remains within the income cap, and existing flexible drawdown users will benefit from the 10,000 AA.
Savers will have access to free, impartial guidance on their pension income choices from a range of independent providers with no vested interest in selling a financial product or service, including MAS and TPAS. The guidance wont be FCA-regulated, but FCA will set standards for guidance providers and monitor compliance with those standards
Mondays announcement included welcome reassurance that the Government wont tamper with the right to normally take 25% of a DC pension pot tax-free. This should give clients more confidence to keep their retirement savings inside the tax-advantaged pension wrapper until theyre needed.
Pre-retirement members of funded DB pension schemes will be allowed to transfer to DC to access the new income flexibility if they want to. But only if theyve taken advice from an independent FCA-regulated professional first.
Most DB members are likely to be best served by sticking with what theyve got. There are, however, members whose needs will be better met by moving to the new flexibility – particularly wealthier savers who value tax-planning flexibility and wealth transfer options over a guaranteed income.
The existing ban on transfers once benefits are in payment will continue. And members of unfunded public sector DB schemes wont be able to transfer to DC.
Death benefit tax to come down from 55%
The tax rate on lump sum death benefits paid from crystallised pots will be cut from the existing 55%. The new tax rate will be confirmed in the Autumn Statement.
This should encourage more clients to seek sustainable income models, rather than strip their funds out to avoid a 55% tax charge on death. Again, advice will be central to obtaining the most tax-efficient outcome to meet clients needs.
Pension age – going up
Normal minimum pension age will increase to 57 in 2028, when the State pension age goes up to 67. This will affect anyone born after March 1973. Going forward, the minimum pension age will be linked to 10 years before State pension age.