Treasury to detail radical pension overhaul

The government is set to announce more details about radical plans to change to the rules governing pension schemes, first outlined in this year’s Budget, which include scrapping the requirement to buy an annuity, and has said that these will now apply to defined benefit as well as defined contribution schemes.

Later today financial secretary David Gauke will present the document explaining the changes, Freedom and choice in pensions: government response to the consultation, to Parliament. These will come into effect from April 2015 and apply to anyone over the age of 55.

From that date,  anyone withdrawing money from their pension after retirement will be charged at the normal rate of income tax paid on their salary rather than the previous tax charge of 55% for full withdrawal, and 25% of the pension pot will be available tax free.

In addition, pension savers will no longer be required to purchase an annuity.

In a statement ahead of the parliamentary debate, Chancellor George Osborne said: ‘I can also confirm today that a new override will be introduced to ensure that pension schemes are able to offer individuals flexible access to their savings, and the tax rules will be amended to allow providers to develop new retirement income products that are tailored to the needs of individual consumers.’

Following a consultation earlier this year, the government has also decided that the new rules will apply to those in defined benefit schemes as well as defined contribution schemes, as previously announced.

The Treasury has released a  pensions overview which states: ‘Government will therefore continue to allow transfers from private sector defined benefit to defined contribution schemes, excluding pensions already in payment, subject to additional and important safeguards.’

It goes on to say: ‘The government continues to believe that transfers from unfunded public service defined benefit schemes should be banned, in order to protect the Exchequer and taxpayers. Transfers from funded public service defined benefit to defined contribution schemes will be permitted, and safeguards similar to those in the private sector will be introduced where appropriate.’

The consultation suggested that the proportion of those seeking to transfer from a defined benefit scheme were likely to be between 10% and 20%.

On the question of the free and impartial guidance which Osborne said would be available in his original Budget statement, the Chancellor said this would be provided by independent organisations, starting with the Pensions Advisory Service (TPAS) and the Money Advice Service (MAS). The government is also seeking support from other ‘trusted consumer-facing organisations’, including Citizens Advice and Age UK.

Osborne stated that the Treasury has obtained approval for an advance from the Contingencies Fund of £10m for preparatory work for the guidance guarantee in advance of Parliament’s approval and will be seeking Parliamentary approval for additional resource of £10m.

As one of the key safeguarding measures, the government intends to make it a statutory requirement on the transferring scheme for all individuals who are considering transferring out of defined benefit schemes to take advice, from a professional financial adviser who is independent from the defined benefit scheme and authorised by the FCA, before transferring. 

In most cases the individual pension member will need to pay for the financial advice. However, responsibility for paying for the financial advice will fall on the employer if the transfer is from defined benefit to defined contribution schemes within the same scheme, or as a result of an employer led incentive exercise. This requirement for professional financial advice would not apply to small pot holders with pension savings below £30,000 as the trivial commutation rules would still apply.

Treasury estimates suggest the changes could affect up to 18m people.  

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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