The 2014 Budget introduced major changes in how pension fund members can take their benefits. The proposed reforms mainly affect members in defined contribution (DC) schemes*, but they also affect those in defined benefit (DB) schemes* too.
The Pensions Trust has members with DC benefits in the Flexible Retirement Plan and the Ethical Fund as well as the following schemes:
- Growth Plan Series 4
- Independent Schools' Pension Scheme (ISPS) DC
- Scottish Housing Associations' Pension Scheme (SHAPS) DC
- CARE DC
- Social Housing Pension Scheme (SHPS) DC
The Pensions Trust also has DB scheme members who have paid Additional Voluntary Contributions (AVCs)* into one of the above arrangements.
Budget Changes: from April 2015
Whatever the size of your DC pension pot, you'll be able to take it as you choose once you've reached the Normal Minimum Pension Age (NMPA)* of 55. If you have a protected pension age (usually members who joined a Pensions Trust scheme before 6 April 2006), you retain the right to take your benefits from age 50. If you do so before age 55, you must have left the employment of the employer who you worked for when the benefits were built up.
When the proposals come into force from April 2015, a number of options will be available to you:
- There will no longer be a requirement to buy an annuity*, but there is still an option to do this if you wish to. You can take up to 25% of your pension pot as a tax-free cash lump sum at retirement, with the remaining fund used to purchase an annuity. Also, annuity providers will be able to offer a wider range of annuity products.
- You can take a cash lump sum from your pension pot, or series of cash lump sums. If you do so, 25% will be taken as tax-free cash, and the remaining 75% subject to income tax at your marginal rate. The entire DC pot can be taken as a lump sum direct from the Trust, however if you wished to take less than the entire pot and leave some invested for the future, currently this will only be available if you transfer to an external provider.
- You can use your pension pot as a flexible source of retirement income via a drawdown arrangement* (this would currently need to be done by transferring to an external provider). If you do so, up to 25% of your pension pot can be taken as a tax-free cash lump sum.
These options can be accessed in isolation from each other, or as a combination, but scheme trustees don't have to make all these payments if they choose not to. The Pensions Trust is currently evaluating what options it may wish to offer in the future.
Reduced Annual Allowance for new DC contributions
If you access your pensions pot flexibly, (in other words you take funds in excess of the tax-free cash lump sum from the scheme or via a drawdown product), you'll have a reduced annual allowance of £10,000 a year in respect of any future DC contributions to another scheme. This is to prevent members from diverting their salary into their pension with tax relief and then immediately withdrawing 25% cash tax-free. The exception to this are DC members who take benefits from a small pot of less than £10,000, who will continue to have an annual allowance of £40,000 for future DC contributions.
DC Death Benefits
If a member dies before the age of 75, on or after 6 April 2015, any remaining DC pension pot will be paid to their beneficiaries tax-free. Similarly, any annuity payment to a beneficiary will also be paid tax-free, where a member dies before age 75.
If a member dies after the age of 75, on or after 6 April 2015, any remaining DC pension pot paid as a lump sum will be taxed at 45% and any annuity payment to a beneficiary will be subject to their marginal tax rate. There is also an intention that if a member dies after the age of 75, on or after 6 April 2016, that any remaining DC pot paid as a lump sum will be taxed at the recipients marginal tax rate.
Expected increase in Normal Minimum Pension Age (NMPA)
The Government has proposed that the NMPA from which benefits can be accessed will increase from the age of 55 to 57 in 2028 – and then it'll change in line with increases to the State Pension Age (SPA) so that it remains 10 years below SPA. The options set out above, in terms of taking benefits, will be available from NMPA. The changes to pension age apply to DB and DC members.
Free impartial pensions guidance
If you have a DC pension, you'll be offered free impartial guidance from April 2015, as you approach retirement, to help you make the most of your pension savings. Its main purpose is to help you make informed choices, rather than advising you to take specific products from specific providers.
To receive free, impartial guidance from the government, visit Pension Wise
Pension Wise is a new government service that will offer you:
1) Tailored guidance (online, over the telephone or face to face) to explain what options you have and help you think about how to make the best use of your pension savings.
2) Information about the tax implications of different options and other important things you should think about.
3) Tips on getting the best deal, including how to shop around.
DB to DC Pension
Transfers from private sector DB schemes to DC schemes will continue to be allowed – but members will have to receive independent financial advice before any transfer can proceed (unless the transfer value is less than £30,000). The Pensions Trust will ask for a copy of the advice received before proceeding with any transfers.
Taking your pension pot as cash for DB members and Small Pots
The amount of overall wealth that can be taken as a one off lump sum for DB members has increased to £30,000. This can be paid out of the scheme when the total value of pension rights under all of the member’s schemes is less than £30,000. The first 25% is tax free and the remaining 75% is subject to income tax at the marginal rate. From 6 April 2015, DB members will be able to take advantage of these provisions from their Normal Minimum Pension Age (usually age of 55).
To find out more see our Defined Contribution Fund Factsheets
Please see www.unbiased.co.uk for a list of independent financial advisers in your area.
This information was true and correct on 11 March 2015.
Additional Voluntary Contributions (AVCs): members may pay these to increase their retirement benefits.
Annuity: is a type of retirement income which provides you with a regular payment, usually for life. In most defined contribution (DC) pension schemes you would use your pension pot to buy an annuity. There are different types of annuity for you to choose from, and usually you can shop around to choose which provider you want to buy it from.
Defined benefit (DB) pension scheme: examples include 'final salary' or 'career average' earnings-related pension schemes. The amount you get at retirement is based on a formula which takes into account a number of things, which could include your earnings and how long you have been a member of the pension scheme. In most schemes, when you retire you can take some of your pension as a tax-free cash lump sum. The rest you get as a regular income, on which you might pay tax.
Defined contribution (DC) pension scheme: your pension pot is put into various types of investments, such as shares (shares are a stake in a company). The amount in your pension pot at retirement is based on how much has been paid in and how well the investments have performed. Normally, when you retire, you can take some of your pension pot as a tax-free cash lump sum. You use the rest to buy yourself an income, on which you might pay tax. These are also known as 'money purchase' schemes.
Drawdown arrangement: some defined contribution (DC) pension schemes allow you to take an income directly from your pension fund rather than using it to buy a regular retirement income. Your pension fund stays invested, so its value can go up and down. The income you get is taxable.
Income tax at the member's marginal rate: Under a marginal tax rate, tax payers are most often divided into tax brackets or ranges, which determine which rate taxable income is taxed at.
Lump sum: a single payment made at a particular time, as opposed to a number of smaller payments or instalments.
Normal Minimum Pension Age (NMPA): Generally, scheme rules must not allow members to be paid any pension benefits from any registered pension scheme before they reach the normal minimum pension age. The normal minimum pension age for a member is usually age 55. However, if you joined a scheme before 6 April 2006 your normal minimum pension age may be 50, subject to certain conditions.
Trivial commutation (taking your pension pot as cash): if your total retirement savings are less than an amount set by the Government, you might be able to choose to take this money as a cash lump sum instead of buying a retirement income. At least 75% of this lump sum will be taxable.
Tax-relief: Tax-relief means some of your money that would have gone to the Government as tax, goes into your pension instead.