The Chancellor’s Budget bombshell of pension reform was accompanied by a consultation document setting out his broad proposals for industry comment. The consultation period ended in early June and in mid-July the Government issued its response. There were few surprises, but some tweaks of note:
- As expected, there will be measures to prevent the new flexibility being used to prove tax-efficient remuneration. Broadly speaking, if you draw more than the tax-free lump sum from your defined contribution pension scheme, your scope for further contributions to such schemes will fall from £40,000 per tax year to £10,000.
- The Government has abandoned the idea of outlawing transfers from private sector defined benefit schemes (e.g. final salary schemes) to defined contribution arrangements. However, it will require anyone wishing to undertake such a transfer to first obtain professional advice. Transfers from public sector defined benefit schemes will not be possible unless the scheme is funded – a rarity outside local Government.
- Guidance – not independent advice – will have to be offered when benefits are drawn. The Treasury will initially design and implement this, with guidance primarily coming from two existing bodies, the Pensions Advisory Service and the Money Advice Service. Product providers will not be involved in supplying the guidance, but they will have to meet part of its cost. Concerns remain about how effective this will be given the short timescale and potential demand.
- The minimum age for drawing benefits will generally rise to 57 in 2028, with further increases thereafter in line with state pension age thereafter, maintaining a gap of 10 years.
- The 55% tax charge on drawdown funds payable on death will change, but the Government coyly says “any changes have the potential for unforeseen and unintended consequences” and so deferred announcing its decision until the Autumn Statement, which probably means early December.
A still clearer outline of the changes should emerge this month as the Government has promised draft legislation for technical consultation.