Explaining the Budget to your employees
The proposals in detail
From April 2015, members will be able to draw down their defined contribution (DC) pension pots as they wish from age 55 onwards – simply paying tax at their marginal rate on whatever income they choose to draw. Existing annuity options will still remain, as will the 25% tax-free lump sum. However, for private sector schemes, the government proposes to raise the minimum retirement age from 55 to 57 from 2028.
To prevent significant unintended tax advantages, following their first flexible withdrawal under the new system, individuals will have a reduced Annual Allowance of £10,000 (rather than the standard £40,000).
Compulsory or optional?
It will not be compulsory for schemes to offer the new DC flexibility. Instead, a permissive statutory scheme rules override will be introduced to ensure pension schemes are able to offer it if they wish to do so. Members of schemes that do not offer benefit flexibility will have to transfer to another arrangement if they wish to access the new alternatives.
The new benefit flexibility will be accessible by members of private sector defined benefit schemes, either by transfer payment or, pending consultation, by conversion of benefits within the same scheme. This will be subject to the member having taken independent financial advice – paid for by the member in most cases. Unfunded public sector DC transfers will be banned – but funded public sector schemes will continue to be able to make transfers to DC schemes.
In another welcome move, the government will extend the right to a transfer value between DC schemes at any point up to the scheme’s normal retirement age (At present, the right to transfer ends a year before normal retirement age).
As expected, DC members will have a right to free, impartial guidance at retirement – although this need not be face-to-face, as initially proposed. It will be tailored to individuals’ personal circumstances, but will not recommend specific products or providers. It will be provided by independent organisations (such as the Pensions Advisory Service and the Money Advice Service) and funded by a new levy on financial services firms.
The government acknowledges that the 55% tax charge on drawdown death benefits is too high; it will announce changes at this year’s Autumn Statement.
The government will change the tax rules to allow providers greater freedom to create new and innovative products which more closely meet consumers’ needs, including allowing annuities to decrease and allowing lump sums to be taken from annuities.
Employers, working with their scheme trustees, urgently need to start planning for the changes which come into effect from April 2015. They need to decide what options they do or don’t want to offer, whether they can make the administration changes in time, and what help their employees will need. All these changes must be communicated quickly. As employees typically start planning their retirement six months beforehand, employers will need to get their ducks in a row by this Autumn.
KPMG's Budget toolkit
To help employers and trustees to develop their responses to the changes in a structured way, KPMG has developed a new Budget toolkit which can be used as part of workshop to help you develop a plan of action to deal with the changes. This two-page document gives an overview of the toolkit.