Budget 2014 – Pension changesPrint publication
In his recent budget, George Osborne announced significant changes for pensions in regard to members of DC schemes in connection with when they can access their pension savings. The changes represent a ‘needle-moving event’ from the previous requirement that, upon retirement, members must purchase an annuity. Further, there has been a significant relaxation in tax charges that are applied when members withdraw their funds upon retirement.
The changes will be staggered. However, transitional changes have already commenced (27 March 2014). The wider changes are proposed to come into effect around April 2015. That said, they are still subject to a consultation paper, until June 2014.
We set out below the key changes to be aware of:
Changes from 27 March 2014
- The maximum annual withdrawal has been increased. Members who have opted for capped drawdown can now withdraw up to 150 per cent for all pension years, commencing on 27 March 2014 and after. However, this arrangement will be subject to the applicable scheme rules permitting this type of payment.
- Trivial commutation payments have been increased. Trustees of DB and DC pension schemes are now able to commute a member’s total benefits in all registered pension schemes up to and including £30,000. This is a £12,000 increase upon the current lump sum.
- The small pot that can be taken as a lump sum has been increased from £2,000 to £10,000. Further, the maximum number of DC pots that can be converted via this provision will increase to three from two.
Changes expected in April 2015
- From April 2015, DC members will be able to access the whole of their pension fund without having to purchase an annuity. Further good news for such members is that they will only be taxed at the marginal tax rate, rather than the existing 55 per cent for full withdrawals. In the Government’s consultation, it has asked for feedback on whether a statutory override needs to be legislated for, in order to ensure that scheme rules do not prohibit DC members taking advantage of this increased flexibility at the time of retirement.
- The fundamental changes will create greater flexibility for DC pensions and their members in contrast to their DB counterparts. DB members may therefore be inclined to transfer their benefits into a DC vehicle to take advantage of these changes. The Government is believed to be concerned that a large scale transfer of DB members to DC arrangements, to take advantage of the new DC flexibilities, could be detrimental to the wider economy. As a result, the Government is to remove the option for public sector DB scheme members to transfer to DC arrangements, and is consulting on whether similar changes are required in relation to private sector pensions.
- Under current legislation, the minimum age one can normally access their pension funds is 55 (without significant tax penalties). This is likely to increase to 57 by 2028, in line with the increase in the state pension age.