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Freedom and Choice in pensions an update

5 Sep 2014

On the 21st July 2014 George Osborne presented to Parliament the Treasury’s response to the “Freedom and Choice in pensions” consultation. This provides further information on the Government’s intentions to introduce new pensions flexibility from 6th April 2015.

The document provides further information on several key areas:

  • How the Guidance Guarantee is to be provided
  • Scope to access new flexibility
  • Confirmation of how income payments will be taxed
  • Availability of transfers from defined benefit schemes
  • New restrictions on the annual allowance (to restrict scope for tax abuse)
  • New flexibility for lifetime annuities
  • Planned reduction to the tax charge on lump sum death benefits
  • Increase to the minimum pension age
  • Application of the triviality rules to defined benefit schemes
  • Changes to QROP rules


How the Guidance Guarantee is to be provided

It has been confirmed that the Guidance Guarantee is to be provided by independent bodies (and not providers or advisers). This could include the Pension Advisory Service (TPAS) and Money Advice Service (MAS), along with Age UK or the Citizens Advice Bureau. The Guidance Guarantee will provide independent factual generic guidance. The service will be paid for through a levy on providers and advisers.

The guidance can be provided via several means. It could be provided online, via telephone, face to face or through skype. There should be a hand off to full regulated advice, and it will be interesting to see at what point full advice is recommended.

Scope to access new flexibility

The intention seems to be that the new retirement flexibility should be available to members of defined contribution pension schemes. Schemes won’t have to offer full flexibility, although they can rely on a statutory override (which would allow tax rules to be applied rather than scheme rules.) if they do want to be flexible. Interestingly there is also to be a consultation on the potential to provide ad hoc withdrawals from defined benefit schemes. Scheme members will have the right to transfer between defined contribution schemes right up until retirement age, giving them the opportunity to move from a scheme that has chosen not to operate full flexibility to one that has.

Confirmation of how income payments will be taxed

It has been confirmed that benefits can be taken in the form of 25% tax-free cash with the remainder being subject to income tax at marginal rate.

Availability of transfers from defined benefit schemes

Transfers won’t be available where the ceding scheme is an unfunded public sector scheme. (These schemes don’t have large funds available to be paid as transfer values.) Transfers from other defined benefit schemes will be allowable, however (where the transfer value is above £30,000) full independent advice must have been given. The individual must pay for the advice (unless the employer has instigated the transfer, in which case the employer must pay for the advice).

New restrictions on the annual allowance

To restrict the scope for tax abuse, if a member has taken benefits under the new rules, their annual allowance will reduce from £40,000 to £10,000. This would apply to someone who has taken tax-free cash (if applicable) plus some flexible income, or who (having been in capped drawdown before 6th April 2015) takes drawdown income payments above the (GAD maximum level.) 
Interestingly, you can take benefits using the “small pot” rules (up to 3 x £10,000) without reducing your scope to use the full annual allowance.

New flexibility for lifetime annuities

There is to be new scope to innovate in the annuity market.

  • A lifetime annuity could be provided which decreases whilst in payment.A lump sum could be provided from a lifetime annuity. This might help those seeking long term care, although the option must be written into the contract at the time of purchase.
  • A lifetime annuity could provide a guarantee of more than ten years.
  • Payments arising from such a guarantee period could be paid to beneficiaries as a lump sum (so long as the payment is under £30,000).


Planned reduction to the tax charge on lump sum death benefits

It has been confirmed that the current 55% tax charge on the settlement of lump sum death benefits from vested pension schemes is to be reduced, although we don’t yet know the new level. The tax charge applies to lump sums settled both pre and post age 75. The new rate will be announced in the Chancellor’s Autumn Statement. We assume the tax charge wont vary dependent on when a plan was taken out.

Increase to the minimum pension age

It has been confirmed that the minimum pension age is to increase from 55 to 57 from 2028. Thereafter it will follow the State Pension Age, being ten years below it. (Exception being that the increase won’t apply to certain public sector schemes (e.g. Armed Forces and Police.)

Application of the triviality rules to defined benefit schemes

It has been confirmed that defined benefit schemes will also continue to be able to operate the trivial commutation and small pots rules, and these will be available from age 55 (instead of the current age 60).

Changes to QROP rules

It has been confirmed that the current requirements for QROPs will be amended to ensure that they fit in with the new flexibility options. Further guidance will be issued in due course.Next stepsThe changes will require new legislation. Draft legislation in the form of a Pensions Tax bill is to be published in August 2014. By October 2014 we are promised further announcements on the impact of the changes on State pensions and means tested benefits.

New opportunities for advice

These announcements highlight some further opportunities for advice.

  1. Those currently in flexible drawdown (and so having no annual allowance) should after 6th April 2015 be able to pay new tax- advantaged contributions of up to £10,000 per year.
  2. Individuals who take advantage of the new flexibility and see their annual allowance reduce to £10,000, may wish to consider contributions into non pensions options.
  3. It’s likely there will be an increased focus on using the small pots rules to commute up to 3 x £10,000. (Still keeping your annual allowance at the full level.)
  4. Those already in capped drawdown will need to look closely at their options if they don’t wish to trigger the reduction in the annual allowance and still wish to contribute.
  5. Changes to the tax charge on lump sum death benefits will mean that individuals should review how death benefits are to be settled from their pension plans, and are appropriate to their needs.


As expected, holistic financial planning will involve maximising tax relief through the accumulation phase, and minimising tax charges when benefits are taken. The new flexibility brings with it a much more positive aspirational message towards pension planning and this is most welcome.

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