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Pension flexibilities: the 'freedom and choice' reforms

Published Thursday, September 29, 2016

Looks at the rules which came into force in April 2015 giving people more flexibility about when and how to access their defined contribution pension savings

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Individuals with defined contribution (DC) pensions build up a pension fund using contributions, investment returns and tax relief. Before 6 April 2015, most people used their DC pension funds to purchase an annuity. This was strongly encouraged by pension tax legislation, which authorised lump sum or flexible payments in limited circumstances. The rationale was that tax incentives were designed to encourage people to save for an income in retirement.

Following the introduction of limited additional flexibility in 2011, the Coalition Government announced more radical reforms in Budget 2014. From 6 April 2015 people aged 55 and over would be able to make withdrawals from their DC pension pot “how they want, subject to their marginal rate of income tax in that year.” The necessary changes to pension tax legislation were introduced by the Taxation of Pensions Act 2014. To help people navigate the expanded range of options, a guidance service – Pension Wise – was established under the Pension Schemes Act 2015  see Library Briefing Paper SN 7042.

Following press reports of perceived difficulties, the Government launched a consultation in July 2015 on whether individuals were able to access the new pension flexibilities easily and at a reasonable cost. An update from the FCA said the overall majority of consumers appeared to have been able to take advantage of the new flexibilities, although there were some situations where this was not the case (PN15-28).

In its response to the consultation in February 2016, the Government announced proposals for making the transfer process smoother and more efficient. It has placed a duty on the FCA to impose a cap on early exit charges (Bank of England and Financial Services Act 2016, s35) and will do the same for trust-based schemes in the forthcoming Pensions Bill .

In its November 2015 report on Pension freedoms advice and guidance, the Work and Pensions Committee called for publication of regular data and research to track the longer term consequences of decisions. In its response, the Government said it was to “ensure that key indicators were being captured and monitored” (para 2.7). In July 2016, the FCA published the terms of reference for its Retirement Outcomes Review, which is to produce its final report in September 2017. Data it had collected so far showed that:

  • More than half of customers are staying with their existing pension provider when accessing their pension savings;
  • A higher number of consumers were entering income drawdown products without use of a regulated advisers; and
  • There had been a significant number of consumers taking full encashment or making high rates of cash withdrawals from their pension savings

It said this suggested that concerns it had previously highlighted – regarding the ability of consumers to make informed decisions and place competitive pressure on firms in the light of increased choice and complexity and increased mass market access to higher-risk products – were being borne out in practice (para 4.6-9).

Plans to allow existing annuity holders the right to sell their income stream to a third party are discussed in Library Briefing Paper CBP-07077 Secondary annuities market (September 2016).

Commons Briefing papers SN06891

Author: Djuna Thurley

Topic: Pensions

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