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Pension flexibilities: the 'freedom and choice' reforms

Published Tuesday, October 3, 2017

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 the pension tax legislation in force at the time, which authorised lump sum or flexible payments in limited circumstances.

In Budget 2014 the Coalition Government announced that 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.” Legislation for this was in the Taxation of Pensions Act 2014. To help people navigate the wider range of options, a guidance service – Pension Wise – was established - 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 that the overall majority of consumers had been able to do so, with some exceptions (PN15-28). In February 2016, the Government announced proposals for making the transfer process smoother and more efficient. It placed a duty on the FCA to impose a cap on early exit charges (Bank of England and Financial Services Act 2016, s35) and enabled this to be implemented in occupational schemes in Part 2 of Pension Schemes Act 2017.

 In July 2016, the FCA published the terms of reference for its Retirement Outcomes Review. In the interim report of this review in July 2017, it identified five emerging issues:

  • consumers who fully withdrew their pots did so partly because they do not trust pensions
  • most consumers choose the 'path of least resistance', accepting drawdown from their current pension provider without shopping around
  • many consumers buy drawdown without advice but may need further protection to manage their drawdown effectively
  • annuity providers are leaving the open annuity market
  • product innovation has been limited

It asked for views on proposed remedies including additional protections for (and measures to promote competition for) consumers who buy drawdown without advice.

In the 2016 Autumn Statement, the Government announced a reduction from £10,000 to £4,000 from April 2017 in the Money Purchase Annual Allowance - which limits the amount individuals can continue to saving in a DC pension once they have accessed their savings flexibly. Provision for this is in clause 7 of the Finance Bill 2017-19.

The Work and Pensions Committee announced a pensions freedoms inquiry on 20 September 2017.

This note looks at the development of policy. FAQs from constituents are addressed in Library Briefing Paper CBP-7997 Workplace pensions 2017: FAQs for MPs (July 2017). The decision not to allow annuity holders to sell their income stream to a third party is discussed in CBP-07077 Secondary annuities market (November 2016).

Commons Briefing papers SN06891

Author: Djuna Thurley

Topic: Pensions

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