Budget 2014 and Pensions – not just for DC arrangements
As the budget changes trickle through parliament, it is worth another look at the changes plus a reminder of the consequences for DB schemes too.
As a reminder of the latest legislative outpourings, the proposals are:
- That on retirement, a member will have greater flexibility on the withdrawal of monies from a money purchase arrangement; the only limit being that, generally, funds cannot be accessed before 55 (increasing to 57 by 2028). a permissive override will be introduced so that trustees can permit flexible payments even if there are not relevant powers under the rules.
- The trivial commutation changes heralded in the Budget will now only apply to defined benefit schemes from April 2015.
- There will be significant changes to the tax treatment of death benefits in both money purchase and defined benefit schemes.
- That individuals can still transfer their defined benefits into money purchase arrangements, subject to certain safeguards.
- These safeguards include an obligation on trustees to ensure that members receive appropriate advice either on taking their funds flexibly (the guidance guarantee) or on transferring defined benefit funds to a money purchase arrangement.
In light of this, what do trustees of a defined benefit arrangement need to consider?
- The flexibility changes referred to above apply not only to schemes which are traditional money purchase pension arrangements; they also apply to any AVCs which are held on a money purchase basis. Trustees will, therefore, need to give careful thought whether to allow the new flexibilities for such AVC arrangements. It may be that rule amendments would be appropriate or trustees may wish to consider using the permissive override.
- All defined benefit schemes should check that their trivial commutation rules are fit for purpose. Although there is no requirement for schemes to offer the maximum available, trustees will need to consider member expectations if this is not offered. It will generally be the case that if the cost of providing the maximum commutation is cost neutral there would seem to be little reason not to offer it.
- In relation to the taxation changes on death, trustees will need to acknowledge that some fund members may wish to delay taking the payments until after the reforms apply from 6 April 2015. Relevant processes will need to be in place to cope with any such request.
- In relation to transfers from defined benefit to money purchase arrangements, trustees should look at their transfer rules to make sure that they are flexible enough in light of proposed changes to the cash equivalent transfer regime. Trustees may also wish to seek legal advice on the extent of their duties for non statutory transfers.
- Trustees should have in place processes to ensure compliance with the advice requirement for members, be it the guidance guarantee or for defined benefit to money purchase transfers.
- Once the trustees have decided how they wish to proceed and have appropriate administrative processes in place, consideration will need to be taken on how this is all communicated to members. This can be a vexed issue as trustees, particularly on the question of defined benefit to money purchase transfers, must not stray into giving financial advice. We would generally recommend that any communications are kept as neutral and factual as possible.
Finally, even when all this is in place, there is still plenty of legislation which may apply to defined benefit schemes. Trustees should, therefore, keep a watching brief on future developments.
The comments made in this article should not be taken as definitive legal advice. We recommend that if any further advice is needed you should please speak to your normal Wrigleys adviser.
Defined benefit pension scheme: a retirement benefit scheme which provides a member a defined level of benefit on death or retirement
Guidance guarantee: all individuals with a DC pension are to be entitled to receive guidance at the point of retirement about their options. There is to be no charge to the member for this advice.
Money purchase arrangement: a pension scheme where the benefits available to an individual member are calculated by reference to the contributions paid, the investment return and the annuity rate at retirement
Trivial commutation: where members of a pension arrangement can take all of their pension as a lump sum if it is below a certain threshold
If you would like any further information, please contact Rebecca Cooke on 0113 244 6100.
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