WELCOME TO CHARLES RUSSELL SPEECHLYS.
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The Chancellor, in this week's Budget, announced some revolutionary changes to how pension benefits from defined contribution schemes can be taken. Under the current rules, DC pension pots need to be either used to buy an annuity; or put into draw-down subject to restrictive conditions.
From April 2015, all these restrictions will be removed so individuals will be able to take out their pension savings free of any restrictions, and subject only to income tax at their marginal tax rate to the extent that the amount taken exceeds the 25% tax free cash lump sum. From 27 March 2014, the existing laws on the extent of permitted draw-down and how small pension pots can be taken as cash are being materially relaxed.
Much of the commentary on the Budget has focused on the impact on individual pension savers, but we have identified some implications for employers, regardless of what pension arrangements you provide for your employees.
The increased flexibility for taking cash at retirement may make pension saving considerably more attractive. This may immediately be reflected in the extent to which employees will opt out of the pension schemes into which employers are currently automatically enrolling them. Opt out rates, so far, have already been lower than expected. The Budget changes may mean this remains the case even when employee contribution rates for auto-enrolment rise steeply in 2017. You may need to revisit your financial models if you had built in any material assumptions on opt out rates.
Some employers are finding that, following the abolition of the default retirement age, older workers are reluctant to retire because they feel that they cannot afford to do so. This can cause difficulties in managing the workforce. The move away from poor value annuities and the increased flexibility on how employees can withdraw their pension savings may assist with this, as older workers may be keener to retire earlier than might have been the case.
Although the minimum age at which a pension can be accessed will increase from age from 55 to 57 in 2028, it will 14 years before this will actually have any impact on employers.
In deciding whether and when employees can afford to retire, they may over-estimate the likely return on their pension savings and under-estimate how long they may live in retirement. The Chancellor has indicated that it will be necessary for employees to receive guidance on their options before accessing their pension savings but it is yet unclear what form this may take and who will pay for it. From the employer perspective, it may be helpful to provide financial education to the workforce to ensure they understand the new rules and have the opportunity to make plans and appropriate provision throughout their working life. The Pensions Regulator is keen that employers providing work-based pension arrangements, and trustees of occupational schemes, should provide sufficient information to members for them to make informed choices with good member outcomes.
Employers should be careful generally to provide only factual information and not stray into the provision of financial advice, as the provision of financial advice by an unauthorised person is prohibited. It can be difficult to identify the point at which the provision of information moves into advice and any communications to employees should therefore be drafted very carefully.
If the radical change to pensions is overall seen as positive - and initial poll results following the Budget suggest it is - saving into a pension scheme may become considerably more attractive. You may wish to increase the extent to which the employees' overall remuneration package includes contributions to pension schemes. This may allow savings on National Insurance contributions, through increased employer contributions instead of pay rises, or by implementing salary sacrifice arrangements.
The new flexibility does not apply to pension savings in defined benefit schemes. Transfers from DB schemes to DC schemes may be attractive to employees who would prefer a cash payment to an income stream, and this may increase the scope for enhanced transfer value exercises and transfers out of at least part of the DB benefits. This can reduce the long term exposure of the employer to DB pension risks, and so its overall funding costs. The Government will be consulting on whether to prohibit or restrict such transfers and so the window of opportunity may be short. Please let us know if you would like us to lobby the Treasury about this.
Finally, there are changes to the tax regime for pensions, announced in previous years but which only take effect from 6 April 2014. The life-time allowance is reducing from £1.5 million to £1.25 million and the annual allowance falls from £50,000 to £40,000. Points for employers to note in relation to these changes include:
This shakeup was unexpected and there is a lot of uncertainty around the way in which these changes will be implemented. More details will emerge as the legislation is debated and the full impact, including any unintended consequences, becomes clear. It is, however, already apparent that there will be a fresh way of looking at pensions and potentially opportunities for employers. If you have any questions on any of these issues or would like generally to discuss what options may be relevant to you, please do contact us.
For more information, please contact Michael Jones on +44 (0)20 7203 8917 or firstname.lastname@example.org