 Tamara Calvert, Pensions Partner, DLA Piper
'Twas the night before Budget and all was quiet in the pensions world. The most exciting thing on the agenda, apart from a new one pound coin, was the non-news that the Chancellor was going to leave the allowances for tax-efficient pension saving untouched this year.
Then, as the Budget streamed live on to computers around the country, sandwiches (and jaws) dropped in surprise when the Chancellor announced the "most far-reaching reform to the taxation of pensions since the regime was introduced in 1921."
Headline changes
From 27 March 2014
• Small pots of £10,000 or less can be taken as a lump sum (up from £2,000)
• Trivial commutation limit increased from £18,000 to £30,000
• Reduction in the minimum income requirement for drawdown (now £12,000, down from £20,000)
• Increase in benefits that can be taken for capped drawdown (now 150% of the value of an equivalent annuity, up from 120%)
From April 2015
• Total flexibility for defined contribution benefits - no need to buy an annuity
• Members can draw down as little or as much as they want from age 55 and be taxed at their marginal rate (down from the current 55% charge)
• Proposal to increase the minimum pension age from 55 in line with increases to state pensionable age, with consultation on increasing the minimum pension age further and narrowing the gap to SPA
• Free face-to-face impartial financial advice for members of DC schemes on retirement
Implications for the pensions industry
Trivial commutation and small pots
The new limits apply to defined benefit and defined contribution schemes. More members aged 60 or over will now be able to ask for their benefits as a lump sum (where scheme rules allow it).
For trivial commutation, the member has to take all benefits from all schemes within a 12 month "commutation period" starting from the date the first payment is made. The new limits only apply to commutation periods beginning on or after 27 March 2014. Members can commute benefits from up to three personal pension plans and any number of occupational pension schemes.
Note that the limit for commutation of dependants' pensions or payment of a winding up lump sum has not changed.
Drawdown
Unlike trivial commutation, these new flexibilities apply to members and dependants. Schemes which offer drawdown will need to consider whether these flexibilities feed through automatically under their rules, or whether a rule amendment is needed.
April 2015 reforms - defined contribution benefits
The devil will be in the detail. HM Treasury is consulting on a number of issues (consultation closes 11 June 2014). In particular we do not yet know whether schemes will need to offer the full range of member options or just allow members to transfer to an arrangement that does offer flexibility (as currently happens with drawdown). If all DC arrangements have to offer all things to all members there is a substantial piece of work to be done to make that happen.
We will also have to wait and see what the new "impartial guidance" requirements look like.
What is clear is that providers need to start thinking about new and innovative retirement income products to keep pace with the dramatic change in the market, and occupational schemes need to be ready to move quickly to respond to the reforms.
April 2015 reforms - defined benefits
The new flexibilities will apply only to defined contribution benefits (the impact on hybrid schemes is not yet clear, but one would expect flexibility for the DC elements of those schemes). As the Chancellor acknowledged, there are consequential implications for defined benefit pensions on which government is consulting and will "proceed cautiously".
The big question is whether transfers from defined benefit to defined contribution schemes will be allowed in the new world. The clear indication is that transfers will not be allowed from public sector schemes to DC arrangements, but in the private sector we won't know until we see the response to the consultation (which could be as early as July 2014).
Immediate issues for the industry
Members who have recently retired from DC arrangements might be seeking to unravel their annuity purchase so that they can take advantage of the new flexibilities. This is fine if the cooling off period has not ended, and HMRC guidance gives some practical help to scheme administrators facing this issue. Members approaching retirement might put things on hold. Trustees in particular will need help processing these requests, and an increased volume of member queries. Trustees and providers also need to consider proactive communications to members (but beware giving unauthorised investment advice…..).
Some defined benefit scheme sponsors might be considering short term transfer exercises just in case the window for DB to DC transfers does close. Partial transfers may also be an option, especially if members can retain a "minimum income" in a DB arrangement and transfer the balance to DC to use flexibly post-2015.
There is an opportunity for all of us in the pensions industry to think about how we can help our clients work through the most significant change to the pensions landscape in living memory. The dynamic world of pensions just got even more exciting.
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