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Budget 2014 - the annuity market bombshell

When are the reforms happening?

The proposed changes to the tax rules are due to be in force by April 2015, but some transitional changes are happening on 27 March 2014.

What is proposed in April 2015?

The tax rules will be changed to allow people in DC pension schemes to access their savings in any way they wish (i.e. full withdrawal at their marginal rate, annuity or drawdown). The 25% tax free lump sum will remain available.

What's happening in the transitional phase?

From 27 March 2014:

  • the minimum income requirement for flexible drawdown (i.e. the current system for withdrawing pensions saving however a member wishes) will be reduced from £20,000 to £12,000;
  • the total amount of "pension wealth" which can be taken as a lump sum will increase from £18,000 to £30,000;
  • the amount of pension which can be withdrawn under capped drawdown will be increased from 120% to 150%;
  • the trivial commutation limit will be increased from £2,000 to £10,000.

How will the 2015 reforms affect people who have already bought an annuity?

It looks as though those who have already bought an annuity will be stuck. Those currently in drawdown should be able to benefit.

Aren't the new reforms going to mean more people falling back on state benefits?

Yes, that is a possibility. However, the Government has stated in its consultation paper that people should be trusted to make sensible decisions in retirement. The new "guidance guarantee" may mitigate against this risk.

When will members be able to withdraw all their DC savings?

They will be able to do this from age 55 (or in some limited circumstances age 50), subject to the scheme rules, without a tax penalty. The Government is proposing to increase this to age 57 from 2028.

Will we have to amend our occupational DC rules so that our members can take advantage of this new flexibility?

We don't know, but you might have to. The Government is keen that scheme rules do not prevent an individual from accessing their pension flexibly and is consulting on whether there should be a statutory override. We would be interested to hear your views.

What will the "guidance guarantee" at retirement mean for our scheme/members?

The Government is consulting on this, but it has said that the guidance should be:

  • impartial and of consistently good quality;
  • covering the entire range of options and equipping the member to take action;
  • free; and
  • face to face.

Won't this mean that all DB members will transfer to DC schemes? Won't the number of enhanced transfer value exercises dramatically increase?

The Government recognises that this presents a risk to the industry and is consulting on the options available. For public service pension schemes, legislation will be introduced to remove the option to transfer to a DC scheme, except in limited circumstances. For private sector DB schemes, the Government is considering the following options:

  • removing the right to transfer from DB to DC in all circumstances (this is its default option);
  • allowing transfers, but ring-fencing the funds transferred (this would be very complicated to administer);
  • capping transfer amounts (say on a yearly basis);
  • allowing transfers provided the DB scheme trustees allow it (this could present significant challenges for trustee boards if things "go awry" after having approved a transfer); and
  • allowing members of DB schemes the ability to transfer to DC (as now).

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2014. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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