2015 pension freedom gets the green light - our summary of the announcement
On the 21 July 2014 the Government gave a clear green light to the radical rewriting of the pension rule book. The announcement confirmed:
- Defined contribution pension flexibility will go ahead from April 2015.
- The headline income flexibility will go ahead as promised. Clients of pension age will be able to take what they want from their defined contribution pension pot, when they want it.
- A £10k annual allowance will apply after a client accesses flexibility, to counter abuse of the new freedom.
- Once a client has accessed the new flexibility, their pension annual allowance will drop to £10k. The trigger for this drop in annual allowance will be when a client first starts taking drawdown income.
- Taking a secure income, or solely taking tax-free cash, won't trigger the annual allowance cut. Neither will accessing a defined contribution pot worth less than £10k under the ‘small pot' rules. Existing ‘capped drawdown' users on 5 April 2015 won't be caught, as long as their drawdown income remains within the income cap, and existing ‘flexible drawdown' users will benefit from the £10k annual allowance.
- The guidance guarantee (i.e. free and impartial guidance) will be delivered by a range of independent providers, including Money Advisory Service (MAS) and The Pensions Advisory Service (TPAS).
- Savers will have access to free, impartial guidance on their pension income choices from a range of independent providers with no vested interest in selling a financial product or service, including MAS and TPAS.
- Schemes and providers will have a new duty to make ‘at retirement' clients aware of this guidance option and give them sufficient information about their pension pot to help them make sense of the guidance.
- Guidance isn't intended to replace professional advice: indeed, it should act as a gateway to advice for those who need it.
- Tax-free cash will stay at 25%.
- Today's announcement included welcome reassurance that the Government won't tamper with the right to normally take 25% of a defined contribution pension pot tax-free.
- Defined benefit (i.e. final salary) transfers will still be allowed - but only after professional advice.
- Pre-retirement members of funded defined benefit pension schemes will be allowed to transfer to defined contribution to access the new income flexibility if they want to. But only if they've taken advice from an independent FCA-regulated professional first.
- Most defined benefit members are likely to be best served by sticking with what they've got. There are, however, members whose needs will be better met by moving to the new flexibility - particularly wealthier savers who value tax-planning flexibility and wealth transfer options over a guaranteed income.
- The existing ban on transfers once benefits are in payment will continue. And members of unfunded public sector defined benefit schemes won't be able to transfer to defined contribution.
- Death benefit tax will come down from 55% - new tax rate to be confirmed in Autumn Statement.
- The tax rate on lump sum death benefits paid from crystallised pots will be cut from the existing 55%. The new tax rate will be confirmed in the Autumn Statement.
- Normal minimum pension age is going up to 57 from 2028.
- Normal minimum pension age will increase to 57 in 2028, when the State pension age goes up to 67. This will affect anyone born after March 1973.
- Going forward, the minimum pension age will be linked to 10 years before State pension age.