The Budget 2014 contained a raft of radical changes to the way in which members of defined contribution (DC) pension schemes can access their benefits in the future. These changes are designed to give individuals more flexibility over how they take benefits at retirement, and to ensure they can make informed decisions about the choices available.
The biggest change is the ability for individuals to fully withdraw their DC pension pot from age 55, subject to their marginal income tax rate. Previously, if an individual wanted to do this both they, and their pension scheme, would have been subject to adverse tax charges.
Whether members can take full advantage of the changes will depend on the rules of their scheme. Employers can expect a flood of queries from members wanting to understand their options and some employees may want to delay retirement until all the changes come into effect.
While the increase in flexibility will be welcomed by individuals, employers with trust-based schemes may be concerned about the new duty to ensure individuals receive good quality guidanceon their options at retirement, in particular, the costs of compliance.
But a big concern for employers and trustees will be to ensure that they cannot be held liable if the advice provided to members subsequently turns out to be poor. Will individuals try to claim against the employer and trustees?
I also expect a number of employers will, thanks to the increase in the defined benefits overall pension savings that can be taken as a lump sum from £18,000 to £30,000, use it as an opportunity to remove some of the smaller liabilities in their schemes by inviting eligible members to take a lump sum.
The detail around the more ‘radical’ changes is still to be worked out and it remains to be seen whether the changes are quite so innovative when they actually come into force.
Faye Jarvis is of counsel at Hogan Lovells International.