Freedom and choice in pensions: Government response to consultation


Published alongside the 2014 Budget, HMT’s consultation “Freedom and choice in pensions” proposed a general overhaul of the tax rules relating to DC benefits, with the intention of giving individuals greater flexibility and choice as to how they use their pension pots at retirement.

On 21 July 2014, HMT issued its response to the consultation.

In this Alert:

Key points

  • From April 2015, individuals aged 55 and over will be able to access their DC pension savings as they wish, subject to paying income tax at their marginal rate (rather than the current 55% charge for full withdrawal).
  • A permissive statutory override will be introduced to ensure all DC schemes are able to offer their members increased flexibility.
  • Every individual with DC savings will have a new right to free and impartial guidance at retirement (known as the “guidance guarantee”).
  • Subject to certain safeguards, the Government will continue to allow transfers from private sector DB schemes and funded public sector DB schemes to DC schemes, excluding pensions that are already in payment.  Transfers from unfunded public service DB schemes will be banned.

The new system

Full flexibility

The Government is pressing ahead with reforms so that, from April 2015, everyone aged 55 or over will have flexibility over how to take their DC pension savings, regardless of the amount of those savings.  This will mean that individuals can take their benefits as a lump sum, purchase an annuity or draw down their DC benefits as they see fit, subject to paying income tax at their marginal rate.

Acknowledging that some schemes are not set up to provide flexible access to pension savings, the Government has decided to put in place a permissive (rather than mandatory) statutory override.  This will ensure that DC schemes are able to allow members to take advantage of the increased flexibility under the tax rules, notwithstanding the scheme’s governing documentation.  In addition, with the aim of ensuring maximum choice up to the point of retirement, legislation will be amended to allow individuals to transfer between DC schemes at any time up to their scheme’s normal retirement age.

The Government also intends to make a number of changes to the tax rules to allow providers greater freedom to create new and innovative products which more closely meet consumers’ needs, including allowing lifetime annuities to decrease and allowing lump sums to be taken from lifetime annuities.

Age for accessing benefits

The Government will increase the minimum age at which people can access their pension savings from age 55 to age 57 in 2028.  The minimum age for accessing pension will remain 10 years below SPA thereafter.

This change will apply to all pension schemes, except those in the public sector that will not link their normal pension age to SPA from 2015, namely the Firefighter, Police and Armed Forces schemes.


New tax rules will be put in place to limit the potential for recycling money through DC schemes to exploit tax reliefs.  The Government is particularly concerned to ensure that individuals do not use the new flexibilities to avoid tax on their current earnings by diverting their salary into their pension savings (with the benefit of tax relief) and then immediately withdrawing 25% tax-free.

Individuals who choose to draw down more than their tax-free lump sum from a DC arrangement will still be able to benefit from tax relief on further contributions to a DC scheme.  However, where the individual accesses a DC “pension worth more than £10,000”, such individuals will be subject to an AA of £10,000 per year.

Tax charge on drawdown savings at death

The Government has concluded that the 55% tax charge currently levied on pension savings in a drawdown account at death will be too high when the new system is up and running in 2015.  It therefore intends to continue considering options for altering this rate and will confirm its intention in the Autumn Statement.

Guidance guarantee

From April 2015, everyone with DC pension savings will be entitled to free and impartial guidance at retirement.  This guidance will be tailored to individual’s personal circumstances, but will not recommend specific products or providers.

To ensure impartiality, the guidance will be provided by independent organisations that have no actual or potential conflict of interest, such as TPAS and the Money Advice Service (MAS).  The Government intends to legislate to give the FCA responsibility for setting standards for guidance and monitoring compliance with those standards.  The FCA has published a consultation,Retirement reforms and the Guidance Guarantee, setting out its proposals.

Pension providers and schemes will be required to make people aware of their right to impartial guidance and to signpost them to the service as they approach retirement.  However, in a move away from the Budget’s original proposals, individuals will now be able to access the service in a range of ways, including face to face, online and over the phone.

The cost of the guidance service will be funded by a levy on regulated financial services firms.

DB schemes

Transfers from unfunded public service DB schemes to DC schemes will be banned.  However, except in respect of pensions already in payment, transfers between DB and DC pension schemes may continue, subject to the following safeguards:

  • Before a transfer can be accepted, the transferee will be required to take advice from a professional financial adviser who is both independent from the DB scheme and authorised by the FCA
  • New guidance will be provided for trustees on the use of their existing powers to delay transfer payments and to take account of scheme funding levels when deciding on transfer values.

The Government also intends to consult on whether to remove the requirement for private sector scheme members to transfer first to a DC scheme in order to access the new flexibilities.

Commutation and small pot limits

The trivial and small pot rules will continue to apply to DB schemes.  Subject to certain conditions being met, these allow individuals to take up to £30,000 of their total pension savings as a lump sum, or a £10,000 small pot as a lump sum.

The Government intends to lower the age at which an individual can make use of these rules from 60 to 55.

Next steps

The Pension Schemes Bill was published in draft on 26 June 2014 (please see our Alert).  It is intended to put in place the regulatory framework for DA pension schemes, as well as the restrictions on transfers from public service DB schemes.  The Bill will be amended to introduce the guidance guarantee.

The Pensions Tax Bill will deal with the legislation needed to introduce the April 2015 changes.  A technical consultation on the draft legislation will be published shortly.  The Bill will then be introduced to Parliament in autumn 2014.

Work on the guidance guarantee will continue over the summer.  In the autumn, we can expect a progress update from the Government and a Policy Statement from the FCA.

If you have any questions about any of the issues raised in this Alert, please speak to your usual Sackers’ contact.