You are here:

House of Commons Library

Pension flexibilities: the 'freedom and choice' reforms

Published Wednesday, November 23, 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

Jump to full report >>

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 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 is providing for the same to apply in trust-based schemes in the Pension Schemes Bill 2016-17.

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 will 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 the 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).

In the Autumn Statement on 23 November, the Government announced a reduction from £10,000 to £4,000 from April 2017 in the Money Purchase Annual Allowance (the amount individuals can continue to saving in a DC pension once they have accessed their savings flexibly).

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

Share this page

Stay up to date

  • Subscribe to RSS feed Subscribe to Email alerts Commons Briefing papers

House of Commons Library

The House of Commons Library provides research, analysis and information services for MPs and their staff.