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 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 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. This was legislated for in the Finance (No. 2) Act 2017 (s7).
The Work and Pensions Committee published a report on pensions freedoms on 5 April 2018. It found that there was “little evidence that savers were frivolously squandering their life savings” but that this did not mean that people were making well-informed pension freedom decisions. It proposed a two-pronged approach:
In its response, the Government said:
The FCA published the final findings of its Retirement Outcomes Review on 28 June. It found that
It launched a consultation on a package of remedies to:
It also recommended that the Government consider the merits of ‘decoupling’ tax-free cash from other pension decisions. This was because many consumers focused on taking the tax-free cash at that point and did not engage with the decision of what to do with the rest of their pot (Retirement Outcomes Review, para 1.38).
The Government said it looked forward to working with the FCA and industry to consider the review’s recommendations (HL 9139, 16 July 2018).
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 (April 2018). The decision not to allow annuity holders to sell their income stream to a third party is discussed in CBP-07077 Secondary annuities market (August 2018).
Commons Briefing papers SN06891
Author: Djuna Thurley