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 savingsJump 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 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.
The Coalition Government wanted to introduce greater flexibility and changed the rules April 2011 allow people to continue with a drawdown arrangement (where they make withdrawals from their fund, leaving the rest invested) throughout retirement. However, there was a cap on the amount that could be drawn down, except where people could show they had other secure pension income above a set amount. In Budget 2014, it announced more radical changes. 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.” To help people navigate the expanded range of options, a guidance service – Pension Wise – was established. For more detail, see SN 7042. These changes were legislated for in the Taxation of Pensions Act 2014 and the Pension Schemes Act 2015.
When the legislation was before Parliament, issues debated included how individuals could be supported to make appropriate decisions and whether sufficient measures were in place to prevent the new rules being exploited for tax avoidance purposes.
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 some situations where this was not the case (PN15-28). The Government has placed a duty on the FCA to impose a cap on early exit charges (Bank of England and Financial Services Bill 2016, s35). A Pensions Bill announced in the Queen’s Speech will include provision for an early exit fees cap in trust-based occupational schemes and to create a system that “enables consumers to access pension freedoms without unreasonable barriers.”
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 working with others to “ensure that key indicators are being captured and monitored” (para 2.7). The FCA is to launch a Retirement Outcomes Review in 2016, to consider the “impact of the pension reforms on competition and switching in the market.”
The new flexibilities do not currently apply to existing annuity holders. The Coalition Government consulted in March 2015 on proposals to allow existing annuity holders to sell that income to a third party (Cm 9046). In July 2015, the Conservative Government said implementation would be delayed until 2017 to ensure there was support for consumers in making their decision (para 1.229). In December 2015, it said it would remove the relevant tax restrictions from April 2017. In the meantime, it legislated to extend the remit of Pension Wise to cover annuities and to enable people seeking to sell annuities above a certain threshold to be required to seek advice (Bank of England and Financial Services Act 2016, s32-3).
Commons Briefing papers SN06891
Author: Djuna Thurley