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Taking stock of the pension freedoms

On 6 April 2015 the new pension freedoms were introduced. Members of defined contribution (DC) schemes now have greater flexibility to choose what they do with their pension pot from age 55.

If their scheme allows, the freedoms mean that at age 55 members of DC pension schemes are able to select from the following options:

  • take 100% of their pension pot as a lump sum on reaching retirement age, the first 25% of which will be tax free and the remainder charged at the individual's marginal rate;
  • take part of their pension pot on retirement and then take as many subsequent withdrawals as they wish, 25% of which will be tax free and the remaining 75% of which will be charged at the individual's marginal rate;
  • choose what they do with any remaining amount that is not taken as a lump sum payment as part of a flexi-access drawdown scheme.

Members are still free to continue to purchase annuities in the traditional way. 

The above flexibilities are not compulsory for all schemes and so a new freedom for members to transfer between schemes (in order to take advantage of the full flexibilities above) has also been introduced.

At the moment, members of Defined Benefit (DB) (eg final salary) schemes need to transfer into DC schemes if they wish to take advantage of the flexibilities. Employers and trustees of DB schemes will start to receive requests from DB members to transfer their pension entitlement into DC schemes, so they should be prepared to explain the new flexibilities. DB scheme trustees need to satisfy themselves that members have taken appropriate financial advice prior to transferring (unless the value of the transfer is less than £30,000). 

Likely developments

DB to DC transfers

Prior to the reforms, there was much speculation as to whether there would be high volumes of requests from DB members wishing to transfer to DC schemes in order to take advantage of the new flexibilities.

Although there have been some reports of high volumes of calls at call centres, we are yet to see widespread transfers by DB members to DC schemes. It seems, to date, that members are taking a more cautious approach than was feared.

Pensions scams/pensions liberation

Cases involving suspected or actual pensions liberation are becoming more common with the Pensions Ombudsman. It is likely that they will continue to increase or increase more rapidly as a result of the new DC flexibilities, as scammers might perceive there to be more opportunity to lure members to transfer benefits and 'liberate' their pension savings. The Pensions Regulator has recently refreshed its Scorpion campaign.

Increase in employer contributions

Auto-enrolment has driven engagement by people in their pensions. Many millions of individuals have been brought into workplace pension schemes since the introduction of the legislation. It is thought that the pension freedoms will further increase people's engagement, potentially placing pressure on employers to contribute more to schemes.

Next steps

If you have not already done so, you should consider how the new flexibilities have been/will be communicated to employees. As a minimum, employers should have directed employees to Pensions Wise (a free impartial pensions advice body set up by the government) for advice. HR and payroll departments should also have had some training in how to cope with enquiries and what information to give members, or should receive this going forwards.

If you have a DB scheme, communications to employees should be treated with care so as not to be seen to be inducing members to transfer out of the DB scheme and into a DC scheme.

Two months in, you should have had a chance to take stock and review the implications of the new flexibilities for your scheme. If you have not already, you should consider reviewing your scheme documents and deciding which, if any, of the flexibilities you wish to offer to members. Depending on the chosen approach, it may be necessary to review your payroll/HR procedures to ensure they can cope with the anticipated demand from scheme members to transfer into or out of your company's scheme.

It may be necessary to amend your DB and/or DC scheme rules to allow payments to be made in accordance with your company’s decided approach to the new freedoms. However, you should note that trustees are still be able to make the newly permitted payments due to a permissive override which came into effect in April 2015.

If you have any questions on this briefing, please speak to James Dean on +44 (0)333 006 0717 or your usual TLT Pensions contact. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2015. 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.

TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England. A list of members (all of whom are solicitors or lawyers) can be inspected by visiting the People section of this website. TLT LLP is authorised and regulated by the Solicitors Regulation Authority under number 406297.

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